General Anti-Avoidance Rule (GAAR)

General Anti-Avoidance Rule (GAAR) – The General Anti-Avoidance Rule (GAAR) is a set of provisions under the Income Tax Act introduced to prevent tax avoidance schemes that are designed to exploit loopholes in tax laws. GAAR empowers tax authorities to deny tax benefits arising from transactions or arrangements that lack commercial substance and are carried out primarily to avoid taxes. It ensures that taxpayers conduct genuine business transactions and discourages artificial or colorable arrangements aimed solely at reducing tax liability. GAAR applies to arrangements exceeding a specified monetary threshold and provides safeguards such as an approval process before invoking its provisions.

Example: If a company routes its investments through a foreign entity solely to claim treaty benefits and reduce taxes, the tax authorities can apply GAAR to disregard the arrangement and tax the income in AY 2023–24 based on actual substance