Strengthening the AAR

Written by Indu Bhan | Indu Bhan | Updated: Jul 23 2014, 07:43am hrs
In view of the delay caused in settling tax disputes in courts coupled with the lack of clarity on impending tax controversies, it is a laudable move by finance minister Arun Jaitley to permit Indian resident taxpayers (beyond certain threshold) to approach the Authority for Advance Rulings (AAR).

The intent of strengthening the AAR by constituting additional benches and enlarging the scope of the Income Tax Settlement Commission to facilitate quick dispute resolution is also among the notable features of Jaitleys maiden Budget.

These measures, if implemented quickly, will go a long way in attracting investments. The fact is that legal redressal of tax disputes is both time-consuming and costly. As a result, more than R4 lakh crore are stuck in litigations before different courts and tribunals.

Though demands for multiple benches to enhance the capacity of the institution of AAR had been doing the rounds for quite some time, now the government needs to take proactive steps towards setting up additional benches, with more judicial members on board. Further, strengthening the infrastructure would enhance the efficacy of this quasi-judicial body. Investors can be certain of doing business in India only when the authority disposes applications expeditiously. As of now, it takes considerable time to obtain rulings from the authority, though it is supposed to dispose of applications within six months. The process for speeding up the advance ruling should also be set in motion by the government.

Till now, the opportunity of obtaining advance rulings from AAR was available only to non-residents and public sector undertakings. The procedure prescribed for obtaining the advance ruling from AAR is simple, inexpensive, relatively expeditious and authoritative.

Advance ruling means written opinion or authoritative decision by an authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto.

The scheme of advance rulings was introduced by the Finance Act, 1993. Under the scheme, the power of giving advance rulings has been entrusted to an independent adjudicatory body. AAR consists of a chairman who is a retired judge of the Supreme Court and two members of the rank of additional secretary to the government of India, one each from the Indian Revenue Service and the Indian Legal Service.

The opening up of avenues for a quicker dispute resolution will certainly go a long way in addressing the tax issues of India Inc. The move would also bring down the pile of litigation pending at the departmental level and the taxpayer would also be clear about the tax implications of a particular transaction.

The AAR ruling is binding both on the taxpayer who has sought it and the government. However, the number of aggrieved parties appealing the authoritys rulings before the courts is increasing. Amendment in the income-tax law is required to make AAR more accountable. The rulings should also set a precedent in similar cases. A ruling on a transaction based on a particular set of principles should apply to other similar transactions so as to avoid multiplicity of opinions. And the authoritys rulings should be directly challenged in the Supreme Court.