1. Income tax legislation: When advance rulings become dead letters

Income tax legislation: When advance rulings become dead letters

The income tax legislation has a separate chapter outlining the method and timelines for taxpayers to obtain an advance ruling regarding their tax liability arising from a transaction proposed to be undertaken by or with a non-resident.

By: | New Delhi | Published: October 13, 2016 6:17 AM
The Finance Minister announced in his Budget Speech of 2014 that tax demands of more than R4 lakh crore were being disputed before various courts and appellate authorities, and that these measures were being undertaken to reduce litigation in direct taxes. (Express Photo) In 2014, the facility of obtaining an advance tax ruling was also extended to a notified class of domestic transactions made by residents. (Express Photo)

The income tax legislation has a separate chapter outlining the method and timelines for taxpayers to obtain an advance ruling regarding their tax liability arising from a transaction proposed to be undertaken by or with a non-resident. The provisions stipulate that the ruling be issued by the Authority of Advance Rulings (a two member expert body located in Delhi) within six months of the receipt of an application from a taxpayer. In 2014, the facility of obtaining an advance tax ruling was also extended to a notified class of domestic transactions made by residents. The Authority was enabled to operate through additional benches outside Delhi and the number of members on a bench were increased to three. The Finance Minister announced in his Budget Speech of 2014 that tax demands of more than R4 lakh crore were being disputed before various courts and appellate authorities, and that these measures were being undertaken to reduce litigation in direct taxes.

The past two years have seen a number of successful initiatives, like the government signing Advance Pricing Agreements (100 till date) with taxpayers about the pricing of their transactions with related non-resident enterprises and the review and reduction in filing of government appeals to higher courts on tax matters. However, the advance ruling mechanism has been a disappointment. More than 500 applications are pending before the Authority. Besides, the average time being taken to pronounce a ruling is 3-4 years or more instead of the stipulated six months. As a result, taxpayers are filing their tax returns for succeeding years without any certainty about the tax implications of the original transactions for which they had sought a ruling. The advance ruling process has, therefore, become a dead letter.

In contrast, the Settlement Commission which is a statutory alternate dispute resolution authority is functioning well. It passes binding orders within eighteen months to settle income tax disputes based on principles of mediation and arbitration. The commission process was earlier subject to similar delays as are being currently experienced in the case of the Authority for Advance Rulings, but the government took several legislative and administrative measures to overhaul the functioning of the commission. There are now a number of internal timelines laid out in the I-T Act, for the tax authorities, taxpayers and the commission, so as to ensure that the settlement process is completed in time. For instance, a settlement application is considered to be admitted if the commission does not pass orders rejecting its admission within 14 days of filing. For deciding about the validity of an application, the I-T department is statutorily obliged to submit its report within 30 days and thereafter, the commission has to give its ruling within 15 days on its validity. Under the rules of the commission, the I-T department is supposed to send a detailed report on a valid petition within 45 days. After providing an opportunity of hearing to both sides, the commission is statutorily bound to issue a ruling on the settlement petition within 18 months. The government has also taken administrative measures to increase the number of benches of the commission and appointed members in a time bound manner, so that there is no disruption for the lack of members.

A similar exercise needs to be undertaken in the case of the Advance Ruling Authority. The statute should have internal timelines as in the case of the commission. For example, the taxpayer could be asked to submit his written arguments along with the application; the tax authority would be obliged to respond in writing to these arguments within 60 days and the taxpayer can again file its counter within 30 days. After studying these arguments, the commission would provide an opportunity of hearing to both sides and decide the matter within the designated period of six months.

Though the new benches of the Settlement Commission were notified in March last year, they are not yet functional and the chairperson’s post is vacant. The government needs to quickly fill up these vacancies with members who have a background and knowledge of international taxation and tax treaties. Unless these twin statutory and administrative initiatives are taken up on an urgent basis to reduce the pendency before the Authority, the claim of providing tax certainty for foreign investment would ring hollow.

The author is of-counsel, BMR & Associates LLP, and, formerly, joint secretary, ministry of finance.
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