Daily Current Affairs : 12-June-2024
In a significant development, the Telangana High Court delivered its first-ever ruling on the General Anti-Avoidance Rules (GAAR), asserting that a taxpayer could not use bonus stripping to offset losses. This judgment holds importance as it clarifies how GAAR should be applied in cases of tax avoidance schemes.
What is Bonus Stripping?
Bonus stripping is a tax strategy used by investors to reduce their taxable income by exploiting the issuance of bonus shares. Here’s how it works:
- The investor buys shares of a company before it issues bonus shares.
- After the bonus shares are allotted, the investor sells the original shares immediately.
- This results in a short-term capital loss that can be offset against other taxable income, thereby reducing the investor’s tax liability.
This method is often seen as an artificial way to avoid taxes because the investor does not actually lose value but creates a tax advantage by manipulating the timing of buying and selling shares.
What are GAAR (General Anti-Avoidance Rules)?
GAAR is a set of tax laws introduced in India to prevent tax avoidance schemes like bonus stripping. These rules, which came into effect on April 1, 2017, allow tax authorities to challenge any transactions that lack commercial substance and are designed solely to avoid taxes. GAAR is outlined in Chapter X-A of the Income-tax Act, 1961.
Key features of GAAR include:
- It gives tax authorities the power to disregard any arrangement if it appears to be a tax avoidance mechanism.
- The rules apply to both domestic and international tax avoidance strategies.
- The goal is to ensure that taxes are paid on genuine business transactions, not on those structured purely for tax benefits.
The Telangana High Court’s Ruling
In this case, the taxpayer used bonus stripping to claim a tax benefit by offsetting capital gains with a loss from the sale of shares after a bonus issue. The Telangana High Court ruled that such actions cannot be allowed, as they fall under tax avoidance. The court applied GAAR principles, emphasizing that the transaction lacked real commercial substance and was carried out solely for the purpose of evading taxes.
Important Points:
Telangana High Court’s Ruling:
- The court ruled against a taxpayer using bonus stripping to offset losses.
- This is the first judgment on the application of General Anti-Avoidance Rules (GAAR).
What is Bonus Stripping?
- Bonus stripping involves buying shares before a bonus issue and selling original shares after the bonus, creating a capital loss.
- This loss can be used to offset other taxable income, reducing the investor’s tax liability.
- It is viewed as a tax avoidance technique, since the investor doesn’t actually lose value but manipulates the timing for tax benefits.
What is GAAR (General Anti-Avoidance Rules)?
- GAAR was introduced in India to prevent tax avoidance schemes like bonus stripping.
- It came into effect on April 1, 2017, under Chapter X-A of the Income-tax Act, 1961.
- GAAR allows tax authorities to challenge transactions that lack real business substance and are primarily aimed at avoiding taxes.
Key Features of GAAR:
- Tax authorities can disregard arrangements that appear to be tax avoidance mechanisms.
- GAAR applies to both domestic and international tax avoidance strategies.
- The objective is to ensure taxes are paid on genuine business transactions, not on artificial tax benefits.
Impact of the Court’s Ruling:
- The court emphasized that bonus stripping lacks commercial substance and is a scheme for tax evasion.
- The ruling highlights the importance of adhering to the spirit of tax laws and avoiding artificial tax avoidance strategies.
Why In News
The Telangana High Court ruled against a taxpayer using bonus stripping to offset losses, marking the first judgment on the application of the General Anti-Avoidance Rules (GAAR) and setting a precedent for how such tax avoidance schemes will be treated in the future.
MCQs about Telangana High Court’s Ruling on Bonus Stripping and GAAR
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What is the main strategy used in bonus stripping?
A. Buying shares after a bonus issue to generate profits
B. Selling shares before a bonus issue to incur losses
C. Buying shares before a bonus issue and selling the original shares after the bonus to create a capital loss
D. Holding shares without selling them after a bonus issue
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What is the purpose of the General Anti-Avoidance Rules (GAAR)?
A. To encourage tax avoidance schemes
B. To prevent transactions aimed solely at evading taxes
C. To promote international trade agreements
D. To support genuine business transactions without exceptions
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Which of the following best describes the Telangana High Court’s ruling on bonus stripping?
A. The court allowed bonus stripping as a valid method of tax reduction.
B. The court ruled that bonus stripping violates the principles of GAAR and cannot be used to offset losses.
C. The court imposed a fine for using bonus stripping but did not invalidate it.
D. The court recommended bonus stripping as a legitimate tax-saving method.
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When did the General Anti-Avoidance Rules (GAAR) come into effect in India?
A. April 1, 2015
B. April 1, 2017
C. April 1, 2019
D. April 1, 2020
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