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Budget 2017 - One Authority of Advance Ruling for Tax
Mekhla Anand, Partner, Cyril Amarchand Mangaldas
Shiladitya Dash, Associate
In a move towards converging the Direct Tax and Indirect Tax administrations and infrastructure in view of promoting the ease of doing business in India, the Government, in the budget for the Financial Year 2017-18 (‘Budget’), has sought to merge the Authority of Advance Ruling (‘AAR’) constituted to look into Indirect Tax matters with the AAR constituted to look in to the Direct Tax matters under the Income Tax Act, 1961 (‘IT Act’).
In pursuance of the same, the Finance Bill, 2017 (‘Finance Bill’) has sought to amend Section 28F of the Customs Act, 1962 (‘Customs Act’), to the effect that the AAR constituted under Section 245O of IT Act shall be the authority for giving advance rulings for the purpose of the Customs Act. Corresponding amendments have been proposed in this regard, in relation to the definitions of the term “Authority”, defined vide Section 28E(e) of the Customs Act, Section 23A(e) of the Central Excise Act, 1944 (‘CE Act’) and Section 96A(d) of the Finance Act, 1994 (‘FA’).
Consequently, the definition of “Applicant” in Section 245N of the IT Act is proposed to be expanded to include within its ambit applications for advance ruling made under the Customs Act, the CE Act and the FA. Parallel amendment to Section 245Q, relating to applications for advance ruling under the IT Act, has also been proposed.
The Finance Bill has proposed the insertion of new provisions in the Acts, in order to facilitate the transfer of pending applications before the present AAR for Central Excise, Customs and Service Tax, to the AAR constituted under the IT Act, with effect from the date on which the Finance Bill receives the assent of the President.
...No doubt the constitution of one AAR to look into matters pertaining to Direct Taxes and Indirect Taxes is an evolutionary change in the time line of the advance ruling system in India. Such a change appears to be targeted towards widening the volume of applications catered to by the AAR by way of an increased work force, functioning under a single administration.
However, one of the biggest issues with the AARs, has been the scarcity of Members to decide on the ever piling quantum of cases/ applications, as the case may be. The current pendency of applications, due for processing by the AAR constituted under the IT Act retrogrades to FY 2009-2010, while the pendency before the AAR for Indirect Taxes runs back to FY 2012 – 2013. With such huge backlogs, the merging of the AARs, thereby resulting in the constitution of a single bench to look into the pending matters, as well as new matters, pertaining to both Direct and Indirect Taxes would only result in further delay in the processing of such applications. In addition, the ambiguity, in the Budget, in relation to the qualifications for appointment as revenue member or law member, may lead to further confusion and deadlock, at the time of appointments, thereby exacerbating the extant sluggish processing of applications for advance rulings.
Further, the proposal for extending the time limit for pronouncement of decisions by the AAR, in alignment with that under IT Act, appears contrary to the intent of the Government to ensure faster resolution of applications.
There is also the rather obvious issue regarding the expertise of the Members who are finally appointed: the Members with experience in Direct taxes may not be able to effectively preside over matters concerning Indirect Taxes, and vice versa. If the intention is to have separate benches then the fundamental reason for convergence itself appears doubtful.
...The convergence also raises the issue as regards whether an Applicant would be in a position to make a single application which would look into both direct tax and indirect tax issues. If so, the necessary follow up question would be the point of intersection of the two separate regimes. For example; in terms of the proviso to Section 245R(2) of the IT Act, the AAR constituted to look into Direct Tax matters shall not allow any application involving the determination of fair market value of any property. However, questions in relation to “valuation” are included in the list of questions on which advance ruling may be sought from the AAR, constituted to look into Indirect Tax matters. There is at present no clarity at how the two contradictory frameworks would be addressed should a single application be allowed.
With the implementation of the proposed Goods and Service Tax (‘GST’) regime in the pipeline, though the proposal to streamline the advance ruling system appears to be intended as a crucial step towards unification of administration, and also reflects the intention of the Government to create an environment for hassle free business processes for the applicants, one may take note of the divergent provisions in relation to advance rulings, housed under the Model draft GST Law (‘GST Law’) released by the GST Council in November 2016. The said provisions provide for the constitution of a separate AAR to look into matters pertaining to GST. The GST Law also proposes to set up such separate AARs in each of the States.
In view of the said provisions under proposed GST Law, the proposal in the Budget as to the constitution of one AAR for Direct and Indirect taxes does not appear to be very logical.
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