General Anti-Avoidance Rules (GAAR) AY 2026-27

General Anti-Avoidance Rules (GAAR) AY 2026-27

Introduction

Chapter X-A of the Income-tax Act contains provisions on GAAR, aimed at curbing aggressive tax avoidance strategies. GAAR applies in addition to or in place of other tax provisions and is effective from Assessment Year 2018-19.

Applicability of GAAR

Section 95 empowers tax authorities to declare an arrangement as an Impermissible Avoidance Arrangement (IAA) if its main purpose is to obtain a tax benefit. GAAR applies from AY 2018-19 and can be invoked for any step or part of the arrangement.

Impermissible Avoidance Arrangement

An arrangement is an IAA if its main purpose is to obtain a tax benefit, and it:

• Creates rights/obligations not ordinarily arising in arm’s length dealings,
• Misuses or abuses tax provisions,
• Lacks commercial substance (Section 97),
• Is carried out in a non-bona fide manner.

If any step/part of an arrangement mainly seeks a tax benefit, the whole arrangement is presumed for tax benefit unless proved otherwise by the assessee.

Lack of Commercial Substance

An arrangement is deemed to lack commercial substance if it:

• Has form inconsistent with its substance,
• Involves round-trip financing,
• Includes accommodating parties,
• Involves self-cancelling/offsetting elements,
• Routed through one or more persons to disguise the value, source, location, ownership, or control of funds,
• A transaction/place of residence/asset location lacking commercial purpose, aimed solely at securing a tax benefit,
• Has no significant impact on business risks or cash flows, except for the tax benefit derived.

Note: When determining whether an arrangement lacks commercial substance, factors such as its duration, tax payments, or exit route may be relevant but are not conclusive.

Consequences of IAA

If an arrangement is held as IAA, tax consequences shall be determined as deemed appropriate, and may include:

• Recharacterising, combining, or disregarding any step or part or whole of the arrangement;
• Treating the arrangement as never entered into or carried out;
• Ignoring accommodating parties or treating them as the same person;
• Deeming connected persons as one for tax purposes;
• Reallocating accruals, receipts, expenses, deductions, reliefs, or rebates among parties;
• Altering the place of residence, asset location, or transaction situs;
• Disregarding corporate structure to look through the arrangement.

For the above purpose, (i) equity may be treated as debt or vice versa, (ii) capital receipts/accruals may be treated as revenue or vice versa, and (iii) any expenditure, deduction, relief, or rebate may be recharacterised.

Treatment of Connected Person and Accommodating Party

For determining tax benefit, (i) Connected persons may be treated as one; (ii) Any accommodating party may be ignored; (iii) Accommodating and other parties may be treated as one; (iv) Corporate structure may be disregarded (look-through approach).

Procedure for GAAR Invocation

• The Assessing Officer makes a reference to the Principal Commissioner or Commissioner.
• A notice is issued by the Principal CIT or CIT to the assessee to submit the objection.
• The taxpayer is given an opportunity of being heard.
• If unsatisfied with the objection, the Commissioner refers the matter to the Approving Panel.
• The Approving Panel, comprising a retired High Court judge, a senior IRS officer, and a tax expert, must issue a binding direction within six months.
• The Assessing Officer shall complete proceedings as per the GAAR provisions and directions of the Principal CIT/CIT/Approving Panel.

Relevant Rules under Income-tax Rules

• Rule 10U: GAAR (Chapter X-A) not applicable to:

o Arrangements where aggregate tax benefit ≤ Rs. 3 crore in the relevant assessment year.

o Foreign Institutional Investor (FII) who:

Is an assessee under the Act,

Has not availed of treaty benefits under Sec. 90/90A, and

Has invested in listed/unlisted securities as per the SEBI regulations or other applicable regulations.

o Non-residents investing (directly or indirectly) in FIIs via offshore derivative instruments or otherwise.

o Any income from the transfers of investments made before 1st April 2017. However, Chapter X-A (GAAR) applies to any arrangement, regardless of entry date, if a tax benefit is obtained on or after 1 April 2017.

• Rule 10UA: Tax consequences to be limited to the part of the arrangement declared as IAA.
• Rule 10UB: AO must issue a notice underSection 144BA to the assessee before reference to the Commissioner, seeking objections on GAAR applicability. Such notice shall include details of the arrangement, the tax benefit arising, the reasons why the main purpose is the tax benefit, how the conditions of Section 96(1)(a)(d) are satisfied, and the documents/evidence relied upon. This rule further prescribes the Forms for reference and directions.
• Rule 10UC: This rule prescribes the time limits for issuing directions and references underSection 144BA.