Apr 02, 2026
Amendments to General Anti-Avoidance Rule – An Overview
The Central Board of Direct Taxes (‘CBDT’) on March 31, 2026, issued two Notifications, making amendments to the Indian Income-tax Rules, 1962 (‘1962 Rules’) and the Income-tax Rules, 2026 (‘2026 Rules’), to restore the grandfathering of investments made prior to April 1, 2017, and excluding the applicability of the General Anti-Avoidance Rule (‘GAAR’) in respect of such investments. The present alert captures the legal position pre and post the Notifications issued by the CBDT.
Legal Position Prior to SC’s Decision in AAR vs. Tiger Global International II Holdings[1]:
i. India codified the doctrine of ‘substance over form’ by introducing the GAAR under Chapter X-A of the Indian Income-tax Act, 1961 (‘1961 Act’), effective for Assessment Year 2018-19 onwards. GAAR vested sweeping powers with the Revenue to declare an arrangement as an ‘impermissible avoidance arrangement’ and, consequently, deny a ‘tax benefit’, including a benefit under an applicable Double Taxation Avoidance Agreement (‘DTAA’);
ii. The 1961 Act and the 1962 Rules provided for certain exceptions from the applicability of GAAR. For instance, gains arising from transfer of investments made before April 1, 2017[2] were specifically kept outside the scope of GAAR and thus, were grandfathered; and
iii. However, GAAR could still be applied to an ‘arrangement’ put in place before April 1, 2017, that yielded a tax benefit on or after April 1, 2017.[3] Having regard to the construct of the 1961 Act and the 1962 Rules, the interpretation that prevailed was that GAAR applied to all cases, except cases involving transfer of an investment made before April 1, 2017.
Legal Position in Tiger Global:
i. The interpretation above was negated by the Supreme Court (‘SC’) in Tiger Global, which was pronounced on January 15, 2026;
ii. The SC observed that GAAR can be invoked even where the investment pre-dates April 1, 2017, irrespective that the exit may be post April 1, 2017. Further, the SC observed that GAAR was applicable in all cases where a tax benefit is obtained after April 1, 2017; and
iii. Hence, as a result of Tiger Global, investments made before April 1, 2017 were not shielded from scrutiny under GAAR.
Current Legal Position:
i. With effect from April 1, 2026, the 1961 Act and 1962 Rules stand repealed and substituted by the Income-tax Act, 2025 (‘2025 Act’) and the 2026 Rules, respectively;
ii. Even though the provisions relating to GAAR were retained in their original format in the first instance, recently, on March 31, 2026, the CBDT issued two Notifications[4] (‘Notifications’), amending the language of the exception from the applicability of GAAR, both under the 1962 Rules and the 2026 Rules. The 1962 Rules were amended since the 2025 Act contains a ‘Repeal and Savings’ clause under Section 536, in respect of all pending proceedings; and
iii. By way of the Notifications, it has now been clarified that GAAR will not apply in cases involving investments made before April 1, 2017. Consequently, all investments made before April 1, 2017, and transfer of which happens after such date are shielded from scrutiny under GAAR, thereby, reinforcing grandfathering of investments made prior to April 1, 2017. Be that as it may, on account of the various observations in Tiger Global, it would still be open to the Revenue to invoke the judicially developed doctrine of ‘substance over form’, or Limitation of Benefit clause/ Specific Anti-Avoidance Rule contained in an applicable DTAA, to deny any tax benefit de hors of the inapplicability of GAAR. Given the decision of the SC, the position which remains is that a Tax Residency Certificate by itself would not be sufficient for claiming any benefit under an applicable DTAA.
[1] [2026] 485 ITR 214 (Supreme Court).
[2] Rule 10U(1)(d) of the 1962 Rules.
[3] Rule 10U(2) of the 1962 Rules.
[4] Notification No. 54/2026/F. No. 370142/15/2026-TPL, amending the 1962 Rules and Notification No. 55/2026/F. No. 370142/15/2026-TPL, amending the 2026 Rules.