"Curbing aggressive tax avoidance strategies" under the General Anti-Avoidance Rule (GAAR) : Clause 179 of the Income Tax Bill, 2025 Vs. Section 96 of the Income-tax Act, 1961

Clause 179 Impermissible avoidance arrangement.

Income Tax Bill, 2025

Introduction

Clause 179 of the Income Tax Bill, 2025, is a pivotal statutory provision that seeks to define and operationalize the concept of "impermissible avoidance arrangement" under the General Anti-Avoidance Rule (GAAR) framework. The clause is central to the legislative intent of curbing aggressive tax avoidance strategies that, while not strictly illegal, are contrary to the spirit and purpose of the tax laws. This provision is not novel in Indian tax jurisprudence; its predecessor, Section 96 of the Income-tax Act, 1961, introduced by the Finance Act, 2013, and effective from April 1, 2016, laid the foundation for the GAAR regime. The operationalization of these anti-avoidance provisions is further clarified by Rule 10UB of the Income-tax Rules, 1962, which prescribes the procedural requirements for invoking GAAR. This commentary provides a comprehensive analysis of Clause 179, examining its objectives, structure, and practical implications. It also offers a detailed comparative analysis with Section 96 and Rule 10UB, highlighting continuities, departures, and interpretative challenges. The analysis is structured to address the legislative intent, the mechanics of the provisions, and their practical impact on taxpayers, tax authorities, and the broader regulatory environment.

Objective and Purpose

The primary objective of Clause 179 is to define and delineate the boundaries of impermissible tax avoidance arrangements that can be targeted under the GAAR. The legislative intent is to empower tax authorities to disregard or recharacterize transactions or arrangements whose main purpose is to obtain a tax benefit in a manner that is inconsistent with the intent of the law. This approach is rooted in the policy imperative to protect the tax base, ensure fairness in the tax system, and deter sophisticated tax planning techniques that exploit statutory loopholes. Historically, the introduction of GAAR provisions in India was a response to increasing instances of aggressive tax planning, especially by multinational enterprises and high-net-worth individuals. The policy rationale was to supplement the traditional "substance over form" and "look through" doctrines with a robust statutory framework that could address complex avoidance schemes not covered by specific anti-avoidance rules (SAARs). Clause 179, like Section 96, is designed to serve as a catch-all provision, allowing tax authorities to challenge arrangements that, while compliant with the letter of the law, defeat its purpose. The provision seeks to strike a balance between the legitimate right of taxpayers to arrange their affairs in a tax-efficient manner and the government's interest in preventing tax base erosion.

1. Definition and Core Elements (Sub-section 1)

This definition adopts a conjunctive approach: for an arrangement to be "impermissible," it must satisfy the main purpose test (i.e., obtaining a tax benefit) and at least one of the four specified tainting conditions.

• (a) Arm's Length Principle: The focus here is on arrangements that create rights or obligations not ordinarily found between independent parties. This aligns with the transfer pricing principle and seeks to identify artificiality or abnormality in the relationship or transaction structure.
• (b) Misuse or Abuse of Law: This covers arrangements that, while technically compliant, subvert the legislative intent of the Act. It is a broad, purposive criterion that empowers authorities to look beyond the literal language of the statute.
• (c) Lack of Commercial Substance: This targets arrangements that lack genuine business purpose, i.e., transactions that exist primarily or solely for tax benefits rather than for substantive commercial reasons. The reference to Section 180 (which presumably defines "lack of commercial substance" in the new Bill) is analogous to Section 97 in the Income Tax Act, 1961.
• (d) Non-Bona Fide Manner: This criterion addresses the means and manner of entering into or carrying out the arrangement, focusing on whether such means are routinely and bona fide employed in similar commercial contexts.

2. Presumption of Main Purpose (Sub-section 2)

This is a significant evidentiary rule. It shifts the burden of proof to the assessee, requiring them to demonstrate that the arrangement (or at least the impugned part or step) was not primarily for obtaining a tax benefit. This "step transaction doctrine" allows authorities to dissect complex arrangements and target specific steps that have a tax avoidance motive, even if the overall transaction has a legitimate business purpose.

Section 96 of the Income-tax Act, 1961

A close reading of Clause 179 and Section 96 reveals near-identical language and structure, with only minor differences:

• Reference to Commercial Substance: Clause 179 refers to "section 180" for the definition of "lack of commercial substance," whereas Section 96 refers to "section 97." This is a technical update reflecting the renumbering or restructuring of the Act in the new Bill.
• Wording of Presumption: Both provisions establish a presumption against the taxpayer where a step or part of the arrangement is tax-motivated, regardless of the overall purpose. The language is almost verbatim, with only stylistic variations ("notwithstanding" vs. "irrespective of the fact").
• Substantive Content: The four tainting conditions (a) to(d) are identical in substance and scope.

In sum, Clause 179 is a direct successor to Section 96, with no material change in substantive law. The continuity indicates legislative satisfaction with the existing GAAR definition and its operational mechanics.

Rule 10UB of the Income-tax Rules, 1962 : Procedural Framework

Rule 10UB operationalizes the statutory provisions by prescribing the procedure for invoking GAAR. Its salient features are:

• Pre-Reference Notice: The Assessing Officer must issue a notice to the assessee before making a reference to the Commissioner, outlining the arrangement, the tax benefit, and the basis for invoking Chapter X-A (GAAR).
• Content Requirements: The notice must set out:
  • Details of the arrangement
  • The tax benefit derived
  • The rationale for considering the arrangement's main purpose as obtaining a tax benefit
  • The reasons for satisfying any of the tainting conditions (a)-(d) of Section 96 (now Clause 179)
  • Documents and evidence relied upon
• Commissioner's Role: Upon receiving the reference and the assessee's reply, the Commissioner may direct the Assessing Officer not to invoke GAAR or, if satisfied of its applicability, refer the matter to the Approving Panel, recording reasons in prescribed forms.

Comparison In Tabular

Rule 10UB thus ensures procedural fairness, transparency, and safeguards against arbitrary invocation of GAAR. It also aligns the administrative process with the substantive thresholds set by Section 96/Clause 179.

Element	Clause 179 of the Income Tax Bill, 2025	Section 96 of the Income-tax Act, 1961
Definition of Impermissible Avoidance Arrangement	Arrangement where main purpose is to obtain tax benefit, and meets one of four specified tests.	Identical language and tests as Clause 179.
Arm's Length Test	Rights/obligations not created between arm's length parties.	Same.
Misuse/Abuse of Provisions	Direct or indirect misuse/abuse of the Act.	Same.
Lack of Commercial Substance	As defined by section 180.	As defined by section 97.
Non-bona fide Manner	Arrangement not ordinarily employed for bona fide purposes.	Same.
Presumption Regarding Main Purpose	Presumption applies if a step/part of arrangement is tax-driven, unless rebutted by assessee.	Same, with slightly different wording ("notwithstanding" vs. "irrespective of").

 

1. For Taxpayers

Taxpayers, especially those engaging in complex cross-border or structured transactions, must now evaluate their arrangements not only for technical compliance but also for their substantive commercial rationale and bona fides. The presumption in Subsection (2) of Clause 179 increases the evidentiary burden on taxpayers to justify the commercial purpose of each step in a transaction.

2. For Tax Authorities

Tax authorities are empowered to challenge arrangements that meet the statutory definition of impermissible avoidance. However, the procedural requirements u/r 10UB require them to document their reasoning, provide adequate notice, and justify their conclusions before higher authorities, ensuring accountability and reducing the risk of arbitrary action.

3. For the Legal System

The provision is likely to generate significant litigation, especially over the interpretation of "main purpose," "misuse or abuse," "commercial substance," and "not ordinarily employed" methods. Judicial pronouncements will play a crucial role in clarifying the scope and application of these terms.

4. Compliance and Risk Management

Businesses must enhance their documentation and risk assessment processes, ensuring that all significant arrangements have a demonstrable commercial rationale and that any tax benefits are incidental rather than the main purpose.

1. International Comparisons

GAAR provisions exist in several jurisdictions, including Canada, Australia, the UK, and South Africa. While the basic structure is similar (main purpose test + tainting conditions), Indian law is notable for its detailed procedural safeguards (as in Rule 10UB) and the explicit presumption regarding step-wise tax benefit, which is broader than some international counterparts.

2. Domestic Comparison: Section 96 vs. Clause 179

As noted, Clause 179 is substantively identical to Section 96, indicating a legislative intent to maintain continuity in the anti-avoidance regime. The cross-reference to the definition of "commercial substance" is updated to reflect the new Bill's structure.

3. Unique Features

• Rebuttable Presumption: The explicit presumption regarding steps or parts of arrangements is a robust anti-avoidance tool, extending the reach of GAAR to "step transactions."
• Procedural Safeguards: The multi-tiered approval process (Assessing Officer -> Commissioner -> Approving Panel) u/r 10UB provides checks and balances, reducing the risk of overreach.

Despite the clarity in statutory language, several interpretative challenges remain:

• Main Purpose Test: Determining whether the "main purpose" is to obtain a tax benefit can be highly subjective, especially in multi-faceted transactions with mixed motives.
• Misuse or Abuse: The scope of "misuse or abuse" is inherently broad and may lead to inconsistent application unless clarified by judicial precedent.
• Commercial Substance: The definition of "commercial substance" (presumably in Section 180) will be critical. Past experience shows that courts often look for genuine economic effects beyond tax benefits.
• Step Transaction Doctrine: The ability to target individual steps, even if the overall transaction has a legitimate purpose, can create uncertainty for taxpayers and may require careful structuring and documentation.
• Burden of Proof: The shifting of the evidentiary burden to the taxpayer under Subsection (2) may be seen as harsh, especially in complex arrangements where the commercial rationale is nuanced.

Clause 179 of the Income Tax Bill, 2025, consolidates and continues the Indian GAAR regime as established by Section 96 of the Income-tax Act, 1961. The provision is comprehensive, targeting arrangements with a main purpose of obtaining tax benefits through artificial, abusive, or commercially insubstantial means. The procedural framework in Rule 10UB ensures due process and transparency. While the substantive law remains largely unchanged, the practical impact will depend on administrative implementation and judicial interpretation. The provision reflects a mature, balanced approach to anti-avoidance, but ongoing guidance and jurisprudential development will be essential to address ambiguities and ensure fair, consistent application.

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Full Text:

Clause 179 Impermissible avoidance arrangement.

 

Dated: 26-4-2025