Meaning of GAAR

• GAAR stands for General Anti-Avoidance Rules under the Income-tax Act, 1961.
  
• It empowers tax authorities to deny tax benefits arising from impermissible avoidance arrangements.
  
• GAAR is intended to counter aggressive tax planning strategies used to avoid tax.
  
• It is codified under Chapter X-A of the Act, from sections 95 to 102.
  
• GAAR is applicable to arrangements entered into primarily for tax avoidance.
  

Scope and Applicability

• GAAR applies to all taxpayers, including domestic and foreign companies.
  
• It is triggered where the main purpose of a transaction is to obtain a tax benefit.
  
• The rules apply to arrangements entered on or after April 1, 2017.
  
• GAAR provisions apply only if the aggregate tax benefit exceeds ₹3 crore.
  
• It covers arrangements such as round-tripping, misuse of tax treaties, and lack of commercial substance.
  

Key Features of GAAR

• Tax authorities can disregard, re-characterize, or re-allocate income under GAAR.
  
• The burden of proving that the arrangement is not for tax avoidance lies on the taxpayer.
  
• An arrangement lacking commercial substance or involving non-arm’s length dealings may attract GAAR.
  
• The Assessing Officer must refer the case to the Principal Commissioner before invoking GAAR.
  
• GAAR overrides provisions of the Double Taxation Avoidance Agreements unless treaty benefit is protected by LOB clause.
  

Impact on Corporate Tax Planning

• GAAR increases scrutiny of complex or artificial tax structures.
  
• It discourages companies from entering into arrangements that do not reflect genuine commercial objectives.
  
• Transactions with related parties, layered investments, and offshore holdings may come under review.
  
• Companies must ensure economic substance and documentation of business purpose.
  
• Tax positions lacking clarity or transparency may be challenged under GAAR.
  

Compliance and Safeguards

• Companies must evaluate GAAR implications in high-value restructuring, financing, and cross-border transactions.
  
• Legal opinions and proper documentation are essential to support the commercial rationale.
  
• Disclosures in audit reports and tax filings must be consistent with GAAR expectations.
  
• CBDT has issued guidance and clarifications on interpretation and implementation of GAAR.
  

Advance Ruling or Safe Harbour provisions may be considered to avoid GAAR litigation.