Income Tax Bill’s GAAR Provisions

March 1, 2025

The Income Tax Bill 2025 proposes changes to the General Anti-Avoidance Rules (GAAR). This aims to empower tax authorities to issue reassessment notices beyond the current time limits. The new rules could allow reassessment of tax years previously considered time-barred. This change is intended to combat tax avoidance more effectively.

What is GAAR?

GAAR is designed to prevent tax avoidance through arrangements deemed impermissible.
It grants tax authorities the power to reclassify transactions as impermissible avoidance arrangements (IAAs). This classification allows for the re-computation of income and tax liabilities.
The rules ensure that any invocation of GAAR is subject to oversight by an Approving Panel led by a High Court judge.

Proposed Changes in Reassessment Notices

Under the existing framework, reassessment notices must be issued within 5 years and 3 months for cases where under-reported income exceeds ₹50 lakh. The new proposal allows for reassessment notices to be issued even for years that have elapsed beyond this limit. This aims to address situations where arrangements deemed as IAAs span multiple years.

Safeguards Against Misuse

To prevent misuse of GAAR provisions, the amendment includes safeguards. The GAAR Panel’s decisions will be recognised as valid indicators of income that has escaped assessment. Furthermore, the requirement for a hearing before issuing reassessment notices is waived in GAAR cases. This streamlines the process for tax authorities.

Implications for Tax Authorities

The proposed changes will enable tax authorities to reassess tax years before and after the current assessment year. This flexibility is crucial, especially when determining whether an arrangement qualifies as an IAA can be time-consuming. The amendment aims to ensure that tax authorities do not miss opportunities for reassessment due to procedural delays.

Example Scenario

Consider a situation where a matter is referred to the GAAR Panel on May 31, 2023, for the assessment year 2018-19. If the GAAR Panel approves the invocation of GAAR for both 2018-19 and 2017-18, tax authorities can now issue reassessment notices for 2017-18, despite the outer time limit having lapsed. This change ensures that income from previous years can still be addressed.

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