After more than a year of GST, around 130 advance rulings and nine appellate orders have been pronounced by the Authority of Advance Ruling (AAR) and the Appellate Authority of Advance Ruling (AAAR) of various states. Most of these have been decided in favour of the Revenue Department – leading to the perception of a “pro-revenue trend” and creating hesitation in taxpayers and their advisers in opting for advance ruling under GST. Despite this, advance ruling continues to be a highly effective tax controversy management tool under GST, at least for tax positions which are almost certain to be disputed by the Revenue Department and for those which are in dispute between contracting parties in commercial contracts.
Where it can be predicted with reasonable certainty that a dispute will arise, advance ruling helps to cut short an otherwise long-drawn and expensive process of tax litigation under GST. If an assessee does not apply for an advance ruling and the Revenue Department differs in its interpretation with respect to the assessee’s GST liability, the litigation will commence in two to five years with a show cause notice seeking to impose GST along with interest and penalty, followed by an adjudication order. In the case of an adverse adjudication order, the assessee’s only resort would be to file an appeal to the appellate authority and then to the appellate tribunal. Given past trends, it is likely that any relief would be received by the assessee only at the appellate tribunal level.
Not only would the exposure in such cases extend to interest and penalty in addition to the GST demand (which can almost double the exposure in some cases), filing an appeal would require a deposit of up to 30% of the disputed sum of tax – capped at ₹1 billion (US$14 million) for both central and state GST. Appeals must go the appellate tribunal, where technical members outnumber the judicial member, before assessees may approach the high court and then the Supreme Court. Cases typically take at least three years to reach the high court, with heightened exposures and deposits for the assessee.
In contrast, where an assessee applies for an advance ruling, section 98 of the Central Goods and Services Tax Act, 2017, requires the AAR to pronounce its ruling within 90 days from the date the application is received. On receipt of the advance ruling order, the assessee may file an appeal to the AAAR within 30 days, which may be extended for up to another 30 days. Where the ruling of the AAAR is adverse too, the assessee may immediately invoke the extraordinary jurisdiction of a high court and file a writ petition under article 226 or 227 of the Indian constitution. The exposure would consist of the GST amount, with limited interest and penalty exposure, if any, and no deposit would be required. The time taken for the dispute to reach the high court level is unlikely to be more than one year.
In other words, certainty of tax position may be achieved far more expeditiously and at a much lower cost if an assessee opts for an advance ruling under GST for issues which are highly likely to be litigation-prone under GST. This is also the case for tax positions which are in dispute between contracting parties in commercial contracts.
In commercial contracts, the supplier and the recipient often have different views on the GST liability of the supplier vis-à-vis the contract. Since GST is an indirect tax which will be a pass-through for the supplier, the supplier-assessee may adopt a conservative view while the recipient, who effectively bears the burden of the GST, would prefer a no-GST position, if possible. As GST is relatively new, such scenarios arise frequently and often lead to stalemate situations. Obtaining an advance ruling and finalizing the GST position is one effective way to break the deadlock. In certain cases, especially where the stakes are high, the parties may agree to pursue this to the high court level for final closure (i.e. AAR followed by AAAR followed by a writ petition before the high court) or they may agree indemnities subject to such a strategy.
In the two scenarios described above, advance rulings are one of the most effective tax controversy management tools. Multinational entities doing business in India as well as domestic companies would do well to use advance rulings under GST strategically instead of rejecting this option on account of a perceived “pro-revenue trend”.
Sudipta Bhattacharjee is a partner and Onkar Sharma is a managing associate at Advaita Legal. Samyuktha Srinivasan, an associate, provided input.
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