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CMA Final · Direct Tax Laws and International Taxation · GAAR

Under the General Anti-Avoidance Rule (GAAR) in Indian income-tax law, an arrangement can be declared an impermissible avoidance arrangement only if its main purpose is to obtain a tax benefit and it satisfies at least one of specified tests. Which of the following is one of those tests?

An arrangement whose main purpose is a tax benefit becomes impermissible if it creates rights or obligations not ordinarily created between arm's length parties, among other tests such as misuse of provisions, lack of commercial substance, or non-bona fide manner. Turnover, cash payments and subsidiaries are irrelevant.

  1. AIt creates rights or obligations not ordinarily created between persons dealing at arm's lengthCorrect
  2. BIt results in a turnover exceeding the prescribed limit for tax audit
  3. CIt involves a payment made to a non-resident in cash
  4. DIt is entered into by a company having more than one subsidiary

Explanation

The tainted-element tests are: creation of rights or obligations not ordinarily created at arm's length, misuse or abuse of the provisions of the Act, lack of commercial substance (deemed or actual), and carrying out in a manner not ordinarily employed for bona fide purposes. Turnover, cash payment and subsidiary count are not tests, so the other options are wrong.

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