To alleviate uncertainty for business created by the complexity of India’s goods and services tax (GST), the government introduced a scheme of advance ruling, borrowed largely from provisions under the previous excise and service tax regimes. The government encouraged businesses to approach the advance ruling authority on the basis that, unless the facts changed, an advance ruling in respect of an applicant was binding on the Tax Department regardless of the department’s opinion on the matter.
Under the GST law, the following questions are eligible for advance ruling: (a) classification of goods/services; (b) applicability of notification; (c) admissibility of input tax credit of tax paid or deemed to be paid; (d) determination of liability to pay tax on any goods have been retained; (e) determination of time and value of supply; (f) registration; and (g) whether an act amounts to or results in a supply of goods/service. The only significant departure from the previous advance ruling scheme is in the composition of the advance ruling panel. While the earlier panels consisted of judicial and technical members with a retired Supreme Court judge overseeing the panel as chairman, the new regime consisted wholly of officers from the Tax Department. The authority was also decentralized with the authority constituted in each state to rule on transactions undertaken locally.
The advance GST ruling scheme proved to be popular. As of May 2018, more than 75 orders had been passed by advance ruling authorities across India. The authorities in Gujarat and Maharashtra led the march, passing 15 and 14 orders respectively. West Bengal followed with 10 and Andhra Pradesh with 8.
A quick study of the first 47 orders found that around 70% of the decisions were against the applicant, around 17% were in favour of the applicant and 11% were partly in favour and partly against, clearly revealing a trend against the taxpayer.
The second trend is that the advance ruling process has proved to be quick. In most cases the authorities have adhered to the statutory time limit of 90 days for passing the order from the time of receipt of the application. This adherence has come with a price – many of the orders are unreasoned without a clear basis for arriving at the decision. However, it must be noted many of the applications filed may have been sketchy in both factual and legal details.
The third observation (which exposes a vital flaw in the scheme) is the conflicting rulings by different state authorities on similar facts or questions of law, and sometimes for the same taxpayer. It was found that taxpayers often had similar transactions in multiple states. Since the advance ruling of one state authority is not binding on other state authorities, multiple advance ruling applications were filed on the same question before different state authorities. While in some of the cases the conclusions have been similar (being against the taxpayer), in other cases the decisions diverged. This poses the question of whether the same taxpayer would have to follow different tax positions in different states. The situation also creates confusion for the central GST assessing authority, which is faced with divergent positions for similarly placed taxpayers and must decide which orders to follow.
This situation is likely to push taxpayers or the Tax Department to approach the high courts for the final tax positions, leading to increased litigation.
The advance ruling scheme provides for appeals from the authority to an advance ruling appellate authority. Many applicants are likely to exercise their statutory right of appeal to have these decisions reviewed by the appellate authority. The appellate authority consists solely of senior departmental officers with no judicial or legal representatives. Nevertheless, it is imperative that taxpayers take advantage of this opportunity by ensuring that the information required for making an informed decision is properly presented.
Despite some discouraging early trends from advance rulings under GST, conclusions must wait until this scheme evolves further. The scheme has potential for throwing up anomalies and to this extent requires tinkering. Would a central advance ruling similar to the one in the previous regime resolve such issues? Is there a case for members with judicial or legal background being necessary for an effective advance ruling process and “balanced” rulings?
With one year of GST around the corner, advance rulings may present a few questions for the GST Council.
L Badri Narayanan is a partner at Lakshmikumaran & Sridharan. Jyoti Pal and Disha Jain are principal associates.
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