General Anti Avoidance Rules (GAAR)

With effect from AY 2018-19, the Indian Income Tax Act has introduced GAAR. GAAR gets attracted if any arrangement or scheme can be regarded as ‘Impermissible Avoidance Arrangement (IAA). IAA can get triggered even in respect of part of the arrangement.

An arrangement will be regarded as IAA, if the ‘main purpose’ is to obtain a tax benefit (Primary Condition) and

  • It creates rights or obligations which are not ordinarily implemented between person dealing at arm’s length
  • Results directly or indirectly in misuse or abuse of the provisions of the act
  • Lacks commercial substance or is deemed to be deficient in commercial substance in whole or in part
  • Is entered or carried out in a manner not ordinarily employed for bona fide purposes.

So combination of primary condition and one of these (i) to (iv) tainted element make an arrangement as IAA.

In view of GAAR now on statute book, every tax planning has to pass through the test of commercial and business motive being at the forefront than tax benefit. Tax benefit has to be ancillary or spin off

benefit which sprouts automatically without being specifically targeted at.

GAAR comes with grandfathering clause and accordingly doesn’t apply to investment existing as on 31.03.2017. Also in terms of Income Tax Rules, the threshold for applicability of GAAR is tax benefit of INR three crore (thirty million).

The firm offers services of reviewing the arrangement and exposure if any to GAAR and its implications.