General Anti-Avoidance Rules (GAAR)

 
Why in News?
As of April 1, 2026, the Indian government has lowered the threshold for GAAR application. Tax authorities can now scrutinize "aggressive tax planning" for transactions starting from ₹2 crore (reduced from the previous ₹3 crore limit).
 
Primary Objective

• To distinguish between Tax Planning (legal) and Tax Avoidance (legal but unethical/contrived).

• To prevent the loss of tax revenue through "Impermissible Avoidance Arrangements" (IAA). 

What Qualifies as an "Avoidance Arrangement"?
A transaction can be flagged under GAAR if it meets any of the following criteria: 

• Abuse of Law: It is not conducted at Arm’s Length (the price is not what independent parties would pay).

• Lacks Commercial Substance: The transaction has no real business purpose other than saving tax.

• Misuse of Treaties: Using "Treaty Shopping" to take advantage of Double Taxation Avoidance Agreements (DTAA) without having a real presence in that country.

• Contrived Rights: Creating rights or obligations that would not normally be created between people acting in good faith. 

Safe Harbours (Exemptions)
Not all transactions are scrutinized. GAAR generally does not apply to: 

• Threshold: Transactions involving a tax benefit below ₹2 crore (as per 2026 rules).

• FPIs: Foreign Portfolio Investors who do not claim treaty benefits and are registered with SEBI (subject to specific conditions).

• Historical Dates: Arrangements entered into before April 1, 2017, are generally "grandfathered" (protected). 

The GAAR Process in India 

1. Notice: A Tax Officer (AO) identifies a suspicious arrangement.

2. Approval: The AO must seek approval from the Principal Commissioner or Commissioner of Income Tax.

3. Reference: If the Commissioner agrees, the case is referred to an Approving Panel.

4. The Panel: Chaired by a high court judge, the panel hears the taxpayer’s side before giving a final direction. 

Key Difference: GAAR vs. SAAR