Ritu
Hello, everyone! I am Ritu Shaktawat, a partner in the Direct Tax practice at Khaitan & Co.
Today, we will discuss an important and timely update related to GAAR - the general anti abuse rules under Indian tax laws. Joining me today is my colleague Vinita Krishnan, who is an Executive Director in the Direct Tax practice at the firm.
Vinita
Thanks, Ritu! Glad to be part of this discussion.
Ritu
The change we are discussing today was announced recently on 31 March 2026, following the Supreme Court’s decision delivered earlier this year in the Tiger Global case. The court interpreted the GAAR rules, specifically the grandfathering benefit, in a manner that created some uncertainty. The recent changes are aimed at addressing these concerns emanating from such interpretation.
Before we dive in, let’s do a quick recap: what is GAAR and the specific grandfathering benefit in question?
Vinita
Yes, let’s understand the core issue first.
As it stands, GAAR was introduced as a domestic anti abuse measure to curb tax avoidance and has been effective from 1 April 2017. In simple terms, it allows tax authorities to step in and treat an arrangement as an “impermissible avoidance arrangement” if the main purpose is to obtain a tax benefit and the arrangement lacks substance. In such cases, taxes can be determined based on substance, rather than form. What’s important to remember is that, if an arrangement is primarily tax-driven, GAAR can even override tax treaty benefits.
Ritu
That’s right. It is also important to note that to protect past investment structures, a grandfathering benefit was provided for investments made prior to 1 April 2017. Specifically, income from the transfer of such investments was kept outside the purview of GAAR.
The tax rules also stated that without prejudice to this specific grandfathering benefit, GAAR would apply to any arrangement, irrespective of the date it is entered into, where a tax benefit arises on or after 1 April 2017. It should be noted that the rules used the term “without prejudice” which became the core issue here. The policy intent, however, was clear – it was to ensure that the arrangement as a whole will not be grandfathered, only the income on transfer of investments made prior to 1 April 2017 were to be grandfathered. But if there is any other income arising from the arrangement (say dividend or interest) or if there are any subsequent investments in the structure, it could be tested under GAAR, regardless of when the arrangement is set up – whether pre-17 / post 17 doesn’t matter.
In Tiger Global’s case, the investment was made prior to 1 April 2017 and therefore, the grandfathering benefit was under consideration. The Supreme Court held that the GAAR grandfathering benefit could be diluted due to the “without prejudice” provision. As per the court, even if the investment was made before 1 April 2017, it can attract GAAR if the arrangement is viewed as impermissible.
This created significant interpretational uncertainty, and opened up pre-1 April 2017 investments to GAAR scrutiny. This is especially relevant for investors from Mauritius, Singapore, and Cyprus with legacy investments, as tax treaties with these jurisdictions provided exemptions for gains on exit where shares in Indian companies were acquired prior to 1 April 2017.
Vinita
Indeed! The Tiger Global ruling effectively turned GAAR’s grandfathering safeguard into more of a “paper tiger.” Various stakeholders raised concerns to the Government that such a broad interpretation could essentially dilute the intended benefit of grandfathering.
On 31 March 2026, the Central Board of Direct Taxes, the apex tax administration body, issued two notifications amending GAAR. The amended rules remove the term “without prejudice” thereby doing away with the related interpretational issues. The position is now clearly articulated that income from transfer of pre April 2017 investments is an exception to the rule which says that any arrangement, irrespective of the date on which it is entered into, is exposed to GAAR scrutiny. SO, there is a clear carve out for gains on such investments from applicability of GAAR.
Ritu
Absolutely! Over the course of last year, the government has redrafted the income tax act and rules with the aim of simplifying technical provisions and removing redundant provisions. The GAAR related changes are consistent with that approach and are of course welcome.
One may ask a question whether the pre amended rules were any different compared to the amended rules. Well, the answer should be no - in spirit and substance the rules state the same thing, that is, income from transfer of investments which were made prior to 1 April 2017 are grandfathered. The changes are aimed at providing clearer and unambiguous drafting and address the concerns emanating from Supreme Court’s interpretation in Tiger Global’s case.
So this is certainly good news for the investors, but does it really end the substance related questioning for pre-April 2017 investments. Vinita – what are your thoughts?
Vinita
Frankly, it is welcome news that income arising from the transfer of such investments has now been expressly ring-fenced from GAAR. However, treaty claims may still be examined under judicial anti-avoidance rules (JAAR), as was the position prior to the Tiger Global ruling. A valid tax residency certificate, a robust and independent board of directors exercising real control, and clear evidence of substance in terms of decision-making and ownership, these factors will remain critical in supporting eligibility for tax treaty relief. One would also hope that tax officers at the ground level align with the government’s intent regarding the grandfathering of pre-2017 investments.
As regards dividend and interest income, even where investments were made prior to 1 April 2017, such income can still be tested under GAAR.
Importantly, these changes are effective from 31 March 2026 and the rules specifically clarify that GAAR provisions should not be invoked on or after 31 March for income from transfer of pre April 2017 investments. Therefore, for any ongoing proceedings as on 31 March 2026, there is a grey area and requires detailed evaluation.
Ritu
Let’s hope that this is also clarified by the government either through a specific amendment or action on the ground where the tax authorities apply these rules considering the overall policy objective.
At a practical level, when planning exits, one must review the arrangements and treaty positions holistically. And we will continue to see negotiations where buyer would want to protect its interests given these recent developments and sellers would want to derive comfort relying on settled positions and recent clarifications.
With that, we conclude today’s podcast. Thank you for your valuable insights, Vinita.
Vinita
Thank you, Ritu and to our listeners for tuning in.
