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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Mehta Pharma Ltd enters a multi-step arrangement. Its overall main purpose is a genuine business expansion, but one step exists mainly to obtain a tax benefit. What is the legal position regarding the main purpose test?

The arrangement is presumed to have been entered into for the main purpose of obtaining a tax benefit unless the assessee proves otherwise. This presumption arises when the main purpose of a step or part is a tax benefit, even if the whole arrangement is commercially motivated.

  1. AThe whole arrangement is presumed to have tax benefit as its main purpose unless the assessee proves otherwiseCorrect
  2. BThe arrangement is automatically valid because the overall purpose is commercial
  3. CThe step alone is ignored and no presumption arises
  4. DThe presumption arises only if the arrangement lasts under a year

Explanation

The Act presumes, unless the assessee proves the contrary, that the arrangement has tax benefit as its main purpose if the main purpose of a step or part is a tax benefit, even if the whole arrangement has another purpose. The burden is on the assessee.

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