1. The Authority for Advance Ruling (AAR) was in news recently. What is the mandate of AAR? Discuss. Bring out the significance of such institutions in reducing litigation.
अथॉरिटी फॉर एडवांस रूलिंग (AAR) हाल ही में खबरों में थी। AAR का जनादेश क्या है? चर्चा करें। मुकदमेबाजी को कम करने में ऐसे संस्थानों के महत्व को सामने लाएं।
Demand of the question:
It expects students to write about the authority of advance ruling and its mandate along with significance of such institution in reducing litigation.
ID Fresh Foods approached the Authority for Advance Ruling (AAR) in Karnataka to seek clarity on whether the preparation of whole wheat parotta and Malabar parotta should attract 5% GST. The Karnataka bench of AAR in its ruling differentiated between khakhra, plain chapati or roti and the parotta, and observed that ready-to-eat parotta needs additional processing by way of heating for consumption, and hence is liable for 18 percent GST.
Authority for advance ruling:
- Authority for Advance Rulings (AAR) is distinct quasi-judicial tribunal which delivers advance rulings in India regarding tax applicable.
- It started initially for foreign investments later on both residents and non residents could seek advance ruling where substantial tax impact involved.
- It is for both direct and indirect taxes. Central Board of Direct Taxes (CBDT), the apex organisation of the direct tax administration, issues circulars for advance ruling on direct taxes.
- Regarding indirect tax: As per CGST/SGST Law and UTGST law, ‘advance ruling’ means a decision provided by the authority or the Appellate Authority to an applicant on matters or on questions specified in CGST/SGST Act as the case may be, in relation to the supply of goods and/or services proposed to be undertaken or being undertaken by the applicant.
- The broad objective for setting up such an authority is to provide certainty in tax liability in advance in relation to an activity proposed to be undertaken by the applicant, attract Foreign Direct Investment (FDI), reduce litigation, pronounce ruling expeditiously in transparent and inexpensive manner.
- Authority for advance ruling’ (AAR) shall comprise one member CGST and one member SGST/ UTGST. They will be appointed by the Central and State government respectively.
Mandate of AAR:
Advance ruling can be of two types on direct taxes:
- The tax administration issues public rulings to clarify a particular provision of the tax law for all or a large class, in the form of interpretative ruling or clarification. It is binding on the tax authorities, and taxpayers can rely on them if applicable to their facts. They are not binding on taxpayers.
- Authority of Advance Ruling also issues Private Rulings. These rulings are issued to a taxpayer regarding the tax treatment of a specific transaction. In India, the AAR, an authority independent of the tax administration, gives these rulings, which are typically made public albeit the identity of the taxpayer concerned is kept anonymous.
- The direct tax dispute resolution scheme Vivad se Vishwas would not cover disputes, including those pending before Authority for Advance Ruling (AAR).
Advance Ruling can be sought for the following questions of indirect taxes:
- Classification of any goods or services or both applicability of a notification issued under provisions of the GST Act(s).
- Determination of time and value of supply of goods or services or both.
- Admissibility of input tax credit of tax paid or deemed to have been paid.
- Determination of the liability to pay tax on any goods or services under the Act.
- Whether applicant is required to be registered under the Act.
- Whether any particular thing done by the applicant with respect to any goods or services amounts to or results in a supply of goods or services, within the meaning of that term.
Significance of AAR in reducing litigation:
- A major source of tax uncertainty is the lack of a clear and timely dispute resolution mechanism, especially an advance resolution procedure, which reduces the likelihood of tax disputes arising in the first place.
- Tax authorities try to avoid tax disputes by issuing public rulings; in which they clarify the application of specific tax provisions to all (or a class of) taxpayers. Beyond this, recognising that individual taxpayers may need specific guidance, tax administrations also provide advance rulings.
- Tax litigation take huge time in Indian courts, the proportion of cases resolved in favour of tax administration in India is only 11.5% as against global average of 65%. Therefore, system of advance rulings in India that eliminates reliance on lengthy appeal process and provides certainty to taxpayers in a reasonable period.
- For GST an applicant can apply for advance ruling even before taking up a transaction proposed supply of goods or services or in respect of a supply which is being undertaken.
- Even though, ruling of AAR don’t have precedent value, it has persuasive value to avoid unnecessary litigation.
- If the applicant is aggrieved with the finding of the AAR, he can file an appeal with AAAR, similar for the concerned or jurisdictional officer. The CGST /SGST Act do not provide for any appeal against the ruling of Appellate Authority for Advance Rulings.
- However, regarding direct tax AAR, in the initial years, with timely and noteworthy decision making, the functioning of the authority addressed the needs of the taxpayers.
- The disposal rate was 80 percent in FY 2006- 07. From FY 2010-11 onwards the disposal rate came down as low as 6 percent in FY 2010-11 and 7 percent in 2014-15. Disposal rate remained in single digit after that except FY-17 even though number of new applications has reduced in recent five years and pendency has increased.
Original intention was to make the AAR ruling non-appealable by both the taxpayer and the tax administration. The actual situation now is that either party can institute an appeal against an AAR ruling as per Indian constitution, writ Jurisdiction may lay before Hon’ble High Court or the Supreme Court. The SC ruled that an appeal against an AAR ruling should be first made before the HC.
Issue of ID food product is not one off, diputes about Dabur, Nestle and Marico also exposed confusion of categorisation of products. There is need of more widespread thinking and broad categorisation to avoid disputes. About direct tax AAR, there is need to increase bench, term of members and reduce vacancy to reduce pendency.