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CS Professional · Advanced Direct Tax Laws and Practice · Transfer Pricing and General Anti Avoidance Rules (GAAR)

Under the Income-tax Act, 2025 (applicable from June 2027), section 178 deals with the applicability of the General Anti-Avoidance Rule. Which statement correctly reflects what section 178 provides?

Section 178 lets an arrangement be declared an impermissible avoidance arrangement notwithstanding anything else in the Act, and the GAAR Chapter can be applied to any step or part of the arrangement, not just to the arrangement as a whole.

  1. AAn arrangement may be declared an impermissible avoidance arrangement irrespective of anything contained in the Act, and the Chapter may be applied to any step in or part of the arrangementCorrect
  2. BGAAR can be applied only to the whole arrangement and never to an individual step within it
  3. CGAAR applies only when the Act's other specific anti-avoidance provisions have first been exhausted by the assessee
  4. DGAAR applies only to arrangements entered into by non-resident assessees

Explanation

Section 178(1) allows an arrangement entered into by an assessee to be declared an impermissible avoidance arrangement irrespective of anything in the Act, and section 178(2) allows the Chapter to be applied to any step in, or part of, the arrangement. The option limiting GAAR to the whole arrangement contradicts sub-section (2).

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