Applicability of General Anti-Avoidance Rule
[Section-178 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 178(1) of Income Tax Act 2025
178(1) Irrespective of anything contained in this Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising from it may be determined subject to the provisions of this Chapter.
Section 178(2) of Income Tax Act 2025
178(2) The provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement.
FAQs on Section 178 of Income Tax Act 2025
What is the General Anti-Avoidance Rule (GAAR) under the Income Tax Act, 2025?
GAAR refers to provisions under Chapter XVIII of the Income Tax Act, 2025, which empower tax authorities to declare certain arrangements by an assessee as impermissible avoidance arrangements and determine tax consequences accordingly.
From when is GAAR applicable under the Income Tax Act, 2025?
GAAR is applicable with effect from 1st April, 2026.
What is an ‘impermissible avoidance arrangement’ under Section 178(1)?
It is an arrangement entered into by an assessee which may be declared as such by the tax authorities if it results in tax avoidance and falls under the provisions of Chapter XVIII.
Does Section 178(1) override other provisions of the Act?
Yes, Section 178(1) begins with a non-obstante clause (“Notwithstanding anything contained in this Act”), meaning it overrides other provisions of the Act where necessary.
Can only the entire arrangement be targeted under GAAR or also parts of it?
As per Section 178(2), the provisions of this Chapter may be applied not just to the whole arrangement but also to any step in, or part of, the arrangement.
Can GAAR apply to arrangements that are otherwise compliant with the Act?
Yes, even if an arrangement technically complies with other provisions of the Act, it may still be scrutinized under GAAR if it lacks commercial substance or is primarily designed to avoid tax.
What are the consequences if an arrangement is declared impermissible under GAAR?
The tax consequences in relation to that arrangement may be determined as if the arrangement had not been entered into, or recharacterized in a manner that aligns with its substance.
Who has the authority to declare an arrangement as impermissible under GAAR?
The designated tax authorities as per procedural rules under Chapter XVIII can initiate and approve such declarations.
Is there a threshold limit for invoking GAAR under the Income Tax Act, 2025?
The threshold, if any, is to be prescribed by the Board through rules or notifications, which should be read in conjunction with this Chapter.
Can a taxpayer challenge a GAAR invocation?
Yes, there is a prescribed process for the taxpayer to make representations, and the matter may be referred to a GAAR Approving Panel for independent review.
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