The Income Tax Bill 2025 proposes a major shift in tax reassessment rules, allowing authorities to issue notices under the General Anti Avoidance Rules (GAAR) even for tax years that have crossed the prescribed time limits. If approved, this change will empower tax officers to revisit transactions executed several years ago if deemed to have been structured primarily for tax avoidance.
Current Law on Reassessment Notices
As per the existing rules, tax authorities can issue reassessment notices if unreported income exceeds ₹50 lakh. However, these notices must be issued within five years and three months from the end of the relevant assessment year. This statutory limit has prevented authorities from investigating older transactions that may involve tax avoidance.
Proposed Change in GAAR Application
The new proposal seeks to override the time limitation by enabling reassessment notices for earlier years-provided the case was referred to the GAAR Panel within the permitted period for the primary assessment year. This means:
- If the GAAR Panel determines an arrangement to be an Impermissible Avoidance Arrangement (IAA) and finds tax avoidance across multiple years, tax officers can reopen those years for reassessment.
- Even if the time limit for reassessment has already lapsed, notices can still be issued for those years based on the GAAR Panel's findings.
GAAR Panel's Role in Tax Reassessment
GAAR provisions empower tax authorities to reclassify transactions as impermissible and recompute tax liabilities. However, safeguards exist to prevent misuse, including mandatory approval from a GAAR Approving Panel, led by a serving or retired High Court judge.
Under the current law, if GAAR is invoked for multiple years, some of those years may become time-barred by the time the panel makes its decision. The proposed amendment resolves this by allowing reassessment notices for those time-barred years if the GAAR Panel referral was made within the reassessment deadline for the primary assessment year.
A tax expert explains: "This change is both reasonable and fair. It ensures that authorities are not restricted from recovering taxes due to procedural delays in GAAR approvals. Moreover, GAAR cases are now exempt from the requirement to provide taxpayers an opportunity to be heard before a reassessment notice is issued."
Illustration of the New GAAR-Based Reassessment Rule
Consider a case where a tax arrangement from Assessment Year (AY) 2017-18 and AY 2018-19 is under review:
- The case is referred to the GAAR Panel on May 31, 2023 for AY 2018-19.
- The GAAR Panel issues its ruling on November 30, 2023, applying GAAR to both AY 2018-19 and AY 2017-18.
- The reassessment deadline for AY 2018-19 is June 30, 2024, so a notice can still be issued.
- However, the reassessment deadline for AY 2017-18 lapsed on June 30, 2023, meaning no reassessment could be done under the current law.
- Under the proposed law, the tax officer can now issue a reassessment notice for AY 2017-18, since the GAAR referral was made before the deadline of the primary assessment year (AY 2018-19).
Implications for Taxpayers
The proposed amendment is expected to have a significant impact on businesses, investors, and multinational corporations engaging in cross-border transactions. Taxpayers with complex arrangements that may fall under GAAR scrutiny should ensure compliance, as the risk of retrospective reassessment increases.
With the government strengthening its anti-avoidance framework, businesses must proactively assess their tax structures to avoid unexpected reassessments under the new GAAR provisions. The final decision on this proposal will be taken once the Income Tax Bill 2025 is reviewed by the Lok Sabha Select Committee on March 6-7, 2025.
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