What Happened
- Indian corporates are seeking clarity on the applicability of General Anti-Avoidance Rules (GAAR) to routine payments made to foreign entities — such as dividends, interest, and royalties — following a Supreme Court ruling that upheld GAAR's override of tax treaty protections.
- In January 2026, the Supreme Court ruled in the Tiger Global case that GAAR can override Double Taxation Avoidance Agreements (DTAAs), setting aside a Delhi High Court decision and restoring the Authority for Advance Rulings' (AAR) finding that the arrangement was structured primarily for tax avoidance.
- The government partially addressed concerns by offering relief on GAAR applicability to pre-April 2017 stock investments, but businesses want broader assurances that tax authorities will not invoke GAAR on ordinary commercial payments that legitimately use treaty benefits.
- Industry's concern is not about abusive tax avoidance structures, but about the risk that tax officers may apply GAAR broadly to standard cross-border transactions that have legitimate business purposes.
- Companies argue that a routine dividend remittance or royalty payment to a foreign parent — even if it reduces Indian tax liability through a treaty — should not be characterised as an "impermissible avoidance arrangement."
Static Topic Bridges
General Anti-Avoidance Rules (GAAR): Framework and Provisions
GAAR is codified under Chapter X-A of the Income Tax Act, 1961 (Sections 95 to 102). It came into force on April 1, 2017, applicable from Assessment Year 2018-19 onwards. GAAR empowers tax authorities to disregard, combine, or recharacterise any arrangement whose main purpose is to obtain a tax benefit and which lacks commercial substance — declaring it an "Impermissible Avoidance Arrangement" (IAA).
An arrangement is an IAA if it: (i) creates rights/obligations not ordinarily created between parties dealing at arm's length; (ii) results in misuse or abuse of the Income Tax Act; (iii) lacks commercial substance; or (iv) is carried out in a manner not ordinarily employed for bona fide business purposes. Tax authorities can then deny treaty benefits, disregard interposed entities, or reallocate income.
- GAAR applies to arrangements where the tax benefit exceeds ₹3 crore in a financial year.
- The Parthasarathi Shome Committee (2012) reviewed GAAR before implementation and recommended safeguards, including a threshold and grandfathering of pre-2010 investments.
- GAAR does not apply to: arrangements where the main purpose is not obtaining a tax benefit, FII/FPI income from stock exchange transactions, non-residents without a PE in India (in certain cases).
- GAAR overrides DTAA protections by virtue of Section 95, which begins with "notwithstanding anything contained in section 90(2)" (treaty override provision) — confirmed by the Supreme Court in January 2026.
- The PCIT (Principal Commissioner of Income Tax) must approve invocation of GAAR; it is not a first-line assessment tool.
Connection to this news: Industry's concern stems from the Supreme Court's Tiger Global ruling, which has affirmed that GAAR can override treaty protections. This creates uncertainty about whether routine commercial transactions can be subjected to GAAR scrutiny, especially if they produce tax benefits under applicable DTAAs.
Double Taxation Avoidance Agreements (DTAAs) and Treaty Shopping
India has entered into DTAAs with over 90 countries to prevent income from being taxed twice — once in the source country (where income is earned) and again in the residence country (where the taxpayer is based). DTAAs allocate taxing rights between countries and typically provide reduced withholding tax rates on dividends, interest, and royalties.
"Treaty shopping" occurs when a resident of a third country routes transactions through a jurisdiction with a favourable treaty with India to obtain unintended treaty benefits. Classic examples: a US entity routing India investments through Mauritius or Singapore to obtain capital gains exemptions under the India-Mauritius or India-Singapore DTAA (prior to renegotiation).
India addressed treaty shopping by: (i) renegotiating the India-Mauritius DTAA in 2016 (capital gains now taxable in India from April 2017); (ii) amending the India-Singapore and India-Cyprus DTAAs; and (iii) implementing GAAR for post-April 2017 arrangements.
- The India-Mauritius DTAA was the most significant conduit for FPI/FDI into India pre-2017; grandfathering was provided for investments made before April 1, 2017.
- OECD's Base Erosion and Profit Shifting (BEPS) project, of which India is a participant, developed the Multilateral Instrument (MLI) and the Principal Purpose Test (PPT) — which parallels GAAR at the international level.
- A Tax Residency Certificate (TRC) is necessary but no longer sufficient on its own to claim treaty benefits if GAAR is invoked.
- The DTAA's Limitation of Benefits (LOB) clause, where it exists, may interact with GAAR — the Shome Committee held that LOB as a special provision should take precedence, though the Supreme Court ruling complicates this.
Connection to this news: The Tiger Global ruling's affirmation that GAAR overrides DTAA means that even entities with valid TRCs from treaty countries cannot automatically claim treaty protection if their arrangement is found to be primarily tax-motivated.
Authority for Advance Rulings (AAR) and Tax Certainty Mechanisms
The Authority for Advance Rulings (AAR) allows non-residents and certain residents to obtain a binding advance ruling on the tax treatment of a proposed transaction before it is entered into, providing certainty and reducing litigation. AAR rulings are binding on the applicant and the tax authorities for the specific transaction.
The Board for Advance Rulings (BAR) now replaces the earlier AAR structure under income tax — established by the Finance Act 2021, constituted under Section 245Q of the Income Tax Act.
- AAR/BAR decisions can be challenged before High Courts and the Supreme Court.
- The Tiger Global case arose from AAR's refusal to grant advance ruling on grounds that the arrangement was prima facie for tax avoidance.
- Advance ruling applications are increasingly being used by MNCs for large, complex cross-border transactions — but GAAR's broadened scope post-2026 ruling reduces the certainty these rulings provide.
Connection to this news: Industry wants legislative or CBDT circular clarification to ring-fence routine commercial transactions from GAAR, so that entities can obtain advance rulings with confidence that standard dividends, royalties, and interest payments will not be recharacterised as impermissible avoidance arrangements.
Key Facts & Data
- GAAR: Chapter X-A, Income Tax Act, 1961 (Sections 95-102); applicable from April 1, 2017 (AY 2018-19).
- Threshold for GAAR invocation: tax benefit exceeding ₹3 crore per financial year.
- Supreme Court Tiger Global ruling: January 2026 — GAAR can override DTAA protection.
- India has DTAAs with 90+ countries; key conduit jurisdictions historically: Mauritius, Singapore, Cyprus.
- India-Mauritius DTAA renegotiated in 2016 — capital gains taxable in India from April 2017; pre-April 2017 investments grandfathered.
- GAAR overrides Section 90(2) (treaty override) under Section 95 of the Income Tax Act.
- Parthasarathi Shome Committee (2012) recommended GAAR safeguards: ₹3 crore threshold, grandfathering, PCIT approval required.
- OECD BEPS Multilateral Instrument (MLI): India is a signatory; PPT (Principal Purpose Test) is the international equivalent of GAAR.