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Budget 2012: General Anti-Avoidance Rules introduced, IT dept is more powerful now

It was expected that General-Anti Avoidance Rules (GAAR) is introduced in the financial budget of 2012-13. This rule is giving more power to the income tax department. They can deny tax benefit if they are observing any kind of way to avoid the tax payments to the government.

Department of Income Tax

Department of Income Tax

For example, if an entity is well settled in Mauritius with the sole intention of claiming exemption from capital gains tax, the tax authorities have the right to deny the claim for exemption under the India-Mauritius tax treaty.

While an earlier order by the Supreme Court of India, in the case of McDowell’s Limited, empowers the department to look through sham transactions devised for avoiding tax, the tax department is restrained by the apex court’s own order in the case of Azadi Bachao Andolan.

Inclusion of GAAR in the income tax act, provides more freedom to the tax authorities to deal with sham transactions.

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