Advance ruling can be obtained in respect of registration requirement, classification, determination of time and value of supply, admissibility of input tax credit and determination of the tax liability. Taxpayers need to exercise this option with caution, compared with other modes of obtaining certainty and dispute resolution, in view of the recent trend of adverse rulings.
India embarked on its journey of ‘One Nation One Tax’ with the introduction of the goods and services tax (GST) in July 2017. The landmark legislation, which has completed two years, is the biggest tax reform in India after independence. The GST Act subsumed erstwhile indirect taxes such as excise duty, value-added tax (VAT), service tax, etc.
In order to ensure uniformity in central and state GST laws, the GST Act promulgated setting up of a GST Council to recommend changes in the law for consistent implementation by the central and the state governments.
Being a new legislation, the GST law posed challenges for both the taxpayers as well as the tax practitioners in the form of interpretation of law, classification of goods and services, admissibility of input tax credit, applicability of exemption notification, etc.
In order to ensure faster disposal of these issues, the GST law borrowed one of the aspects from the erstwhile indirect tax legislation, ie the mechanism of obtaining an advance ruling. An advance ruling helps a taxpayer to obtain the required clarity on taxability of a transaction in advance thereby enabling it to avoid future disputes.
Under the GST law, an advance ruling can be obtained with respect to registration requirement, classification, determination of time and value of supply, admissibility of input tax credit of tax paid and determination of the liability to pay tax on any goods or services or both.
The Authority for Advance Ruling (AAR) has been constituted in each state/Union territory under the GST regime. An applicant seeking an advance ruling is required to file an application before the state/Union territory AAR providing required details such as the facts of the case, issues on which advance ruling is sought along with the contentions in relation thereto. The AAR is required to give its ruling within 90 days of the receipt of the application.
There is also an appellate forum created in each state in the form of Appellate Authority for Advance Ruling (AAAR). Any applicant aggrieved by the AAR’s ruling can appeal before the AAAR. The AAAR is also required to pass its order within a period of 90 days of the filing of the appeal.
The advance ruling process has gained considerable traction under GST with close to 1,000 applications made to the advance ruling authorities by taxpayers. In a short span of two years, the AAR’s have passed rulings on various critical tax issues like tax treatment on transfer of business as a ‘going concern’, provision of back office support services by Indian entity to overseas entity, treatment of interest free security deposits, etc. One should note that while the ruling passed by the AAR and AAAR are binding only on the applicant and the jurisdictional authorities, the same carries persuasive value for others.
Thus, it can be seen that the aim of the advance rulings framework is to provide certainty and clarity to the taxpayer with respect to its obligations under the GST Act in a time-bound manner.
However, this does not mean that advance rulings are free from imperfection. One key limitation of the AAR/AAAR is that there have been numerous instances of divergent rulings being passed by different state AARs on issues such as taxability of cross charges for common administrative and IT support services by employees of one unit to other units, differential tax rates in case of solar energy sector etc. Further, there have been instances where decisions of the authorities are contrary to the position settled under the erstwhile indirect tax regime.
The GST Council, in order to address these limitation, had recommended formation of a centralized appellate authority. The Union cabinet has recently approved the formation of a national bench of the GST Appellate Tribunal (GSTAT) at New Delhi to address tax disputes due to contradictory rulings. However, the procedural guidelines of the GSTAT are yet to be issued. Thus, one may reasonably infer that the government is actively trying to address the current limitation in the existing advance ruling mechanism.
To conclude, a taxpayer should tread the path of obtaining an advance ruling with caution. The taxpayer should not only be well versed with the available jurisprudence under the erstwhile indirect tax regime but also be cognizant of the rulings passed by other AAR/AAAR, if any, on similar fact pattern. Further, it has generally been observed that cases where taxpayers have maintained appropriate documentation to substantiate their claims stand a better chance of obtaining a favourable ruling from the AAR.
While AAR/AAAR is a good mechanism for the tax payers to address their concerns, the recent trend of adverse / different rulings should be kept in mind before a tax payer opts for such a ruling. It is anticipated that once the GSTAT is fully operational, some of these concerns would get addressed. Till then, tax payers should act with caution and take this dispute resolution mechanism with a pinch of salt.