Advance ruling in GST Boon or Bane?
Taxes are inevitable but certainty and simplicity in taxation system is desirable. Lack of certainty and presence of complexity leads to disputes. To minimize disputes, the taxation system typically provides an administrative mechanism to iron out foreseeable interpretational issues in advance. According to global practices, this advance ruling mechanism comprises public and private rulings. While public rulings represent the administrations interpretation of a particular provision that affects a large number of taxpayers, private rulings are issued pursuant to an application made by a taxpayer on the interpretation of a provision on specific transactions. In India, private rulings are commonly known as advance rulings.
Advance ruling is a mechanism through which taxpayers can request the Authority for Advance Rulings (AAR) for a ruling on GST issues which the taxpayer anticipates. This would help the assessee in following the correct tax treatment from inception and avoid disputes with the department at a later date. The GST regime also has a specialised forum to look into appeals arising against orders of the AAR, known as the Appellate Authority for Advance Ruling (AAAR).
The concept of advance ruling existed in the erstwhile Indian indirect taxation regime as well. However, not only was the scope of matters which could have been referred to AAR restrictive, but also, only specified applicants could seek such a ruling. For example, in service tax, scope of requisition was restricted to only new services which an applicant was proposing to provide. Further, across India there was only one centralized AAR which led to long pendency in disposal of cases. These issues have been largely ironed out in the present (GST) regime.
In the GST regime, scope of advance ruling has been widened so that ruling can be sought not only on proposed supply of goods or services, but also on existing arrangements. Further, all registered persons and persons aspiring to obtain GST registration can seek advance ruling. In addition, AAR is now set up for each state.
In view of the above measures, AARs in the GST regime have witnessed a brisk inflow of applications. As per information available in public domain, until November 2018, more than 663 applications seeking advance ruling were received across the country. This is in sharp contrast to the pre-GST regime wherein the total applications filed under the central excise, service tax, and customs law were only about 122. Further, MIS on rulings passed by state AARs until December 18, available on the CBIC website, indicates that out of 713 applications received across India, 385 applications have been disposed off. While these are encouraging indications, every coin has a flip side.
The industry has witnessed that most of the AARs which have emerged are indicative of pro-revenue sentiment. This is backed by statistics. In the erstwhile regime, even when the route of writ petitions (only available remedy) was opened after the Columbia Sportswear judgment of AAR, on the indirect tax side, no petition had been filed against its ruling in any court. In contrast, appeals filed before the Appellate Authorities for Advance Ruling were about 52 until December 2018.
Perusal of the decisions of AARs also indicate that some the decisions have contradicted with decisions of another states AAR or the departments own prior clarification.
As an illustration, in one case the issue was whether in case of separate contracts for supply of goods and services for a solar power plant, there would be separate taxability of goods as solar power generation system at 5 percent and services at 18 percent. Maharashtra AAR ruled that the goods will be taxed at 18 percent as they are in overall nature of works contract (i.e. service) whereas, Karnataka AAR ascertained that the rate of tax should be 5 percent.
In another instance, AAR Delhi bench issued an order holding that supply of food and beverages by Railways in trains would be taxed at the rate applicable on each such item despite there being a department circular clarifying that such supplies will be taxed at 5 percent.
The surge in pro-revenue AAR decisions may be attributable to the present composition of AAR. In the pre-GST regime, AAR was comprised of persons such as retired Supreme Court judges, officers of Indian Legal Service etc. who were independent of tax department. However, in the new regime, AAR is comprised mostly of revenue officers at the hierarchy of Joint Commissioner thereby, inadvertently leading it to function as an extension of the department. Therefore, given the composition of present AARs, high surge in appeals filed by tax payers is not surprising.
The government is not oblivious of the flaws in the present AAR system. The GST Council at its 31st meeting provided an in-principle approval for creation of a centralized AAAR to deal with cases of conflicting decisions by two or more state AARs on the same issue. While this is a welcome step, it is suggested that composition of AAR may also be revisited. This will restore the image of AAR as an objective and fair institution and inspire far greater trust and confidence amongst tax payers which will lead to minimization of disputes.
Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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