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CMA Final · Direct Tax Laws and International Taxation · GAAR

Under the GAAR framework, which of the following is a consequence that may follow once an arrangement is declared an impermissible avoidance arrangement?

Once an arrangement is declared impermissible, its steps may be disregarded, combined or recharacterised so the tax benefit is denied. Income and expenses may be reallocated and treaty benefit may be denied. Automatic prosecution, PAN cancellation or reassessment of unrelated years are not GAAR consequences.

  1. ADisregarding or combining the steps of the arrangement and treating them as if not entered intoCorrect
  2. BAutomatic prosecution of the taxpayer's directors
  3. CCancellation of the taxpayer's PAN
  4. DMandatory reassessment of all earlier years irrespective of the arrangement

Explanation

Consequences include disregarding, combining or recharacterising the arrangement or its parts, reallocating income or expenses, treating parties as one, and denying treaty benefit. Prosecution, PAN cancellation or blanket reassessment are not listed GAAR consequences. The first option reflects the recharacterisation power.

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