The existing advance-ruling mechanisms of the states offer interesting policy choices
The goods-and-services tax (GST) Bill has led to considerable discussion on the national and regional fronts. Intense debates on key nuances of the GST framework, such as rates of tax, credit structures, etc, have been played out on the national media. However, it is equally important to have a structured discussion on the position and scope of the ‘advance ruling’ mechanism under the proposed regime. This is the one feature of any tax-system which has the innate capacity to reduce dispute by far—and thus, it could make GST a successful tax-system.
As much as one may wish otherwise, taxes are a part of life. However, one can definitely wish for a tax regime which is certain and especially one which does not provide room for litigation. The indirect tax systems in independent India have failed to attain this ideal despite the numerous reforms, which were at best partial and ad-hoc. Given that GST would replace the existing tax system entirely, it is appropriate to design it in a manner that reduces the scope for litigation and provides certainty and predictability. It is at this juncture that the advance-ruling mechanism has a crucial role.
The mechanism, as a part of alternate dispute resolution under a tax-system, formally examines an existing or proposed transaction to issue a ruling on the applicable tax-position. These rulings generally are binding on both the tax-payer and the tax-administration, and have various positives for the tax environment. First, the mechanism obliges the tax-administration to examine the position of the tax-payer and formally issue its interpretation of the transaction being reviewed. This is in contrast with the typical stance of the tax-administration, which prefers to review the tax-position of the transaction after its culmination. On this account, the likely tax-liability on the transaction is known to the tax-payer at the very inception and thus can be adequately provided for. Second, the fact that the tax-administration has examined the transaction in advance precludes it from challenging the tax-position at a later date. Thus, the mechanism nips in the bud likely disputes on account of difference of interpretation. Third, even an adverse ruling only results into tax-consequences, preserving the tax-payer from interest and penal implications which often accompany a post-facto review by the tax-administration. The advance-ruling mechanism, in short, is a shield for the tax-payer from likely harassment and subjugation as an adversarial consequence of tax-litigation.
Today, all major central indirect tax legislations (i.e. customs, excise and service tax laws) have provision for advance-ruling. Further, more than 20 states provide for the mechanism of advance-ruling under their respective value-added tax legislations in some form or the other. This reflects the seminal importance and acceptability of the mechanism even under the existing tax-systems. This also implies that it is no longer a moot question whether or not to have the advance-ruling mechanism in the GST regime. The answer to it is an emphatic affirmative and the only task that possibly remains is one of choice of form and designing the mechanism for the GST regime. It is at this juncture that the policy-makers need to cautiously retrospect.
The advance-ruling mechanism under the central legislations is comparatively restrictive. The applicable regulations reduce the eligibility for the ruling to a limited set of tax-payers who are above stipulated thresholds. These further preclude the designated authority from issuing rulings in identified set of circumstances. The regulations further require an indispensable process of application submission, formal response by the concerned department and a hearing before the authority which is often adversarial in character. The need to expand the scope has been often addressed in various platforms, but to limited avail.
The advance ruling mechanisms under the state value-added tax (VAT) legislations are comparatively wide, even though they differ in their relative scope and applicable methodology. For illustration, while the eligibility criteria under the central laws permit only rulings on proposed transactions, the state laws generally do not impose such criteria. In fact, states like Arunachal Pradesh even permit rulings on concluded transactions. Further, under the central laws only the concerned tax-payer in question can apply for a ruling. However, some states, such as Assam and Haryana, permit even industry associations to apply for advance rulings. Predominantly, both under the central and state laws, the advance rulings are binding on the applicant tax-payer. However, in states such as Orissa, the rulings are binding on one and all, thereby translating the ruling into an exposition of the legal position on the subject. Regarding the avenue to challenge adverse rulings, the central laws do not provide any mechanism. In terms of judicially evolved standards, acceptance of a challenge against such ruling is the discretion of the higher court. Some states such as Karnataka and Maharashtra, however, provide for appellate review of these rulings. While the usefulness of appellate review of advance rulings may be subject to debate, at least, the tax-payer is not without remedy against adverse rulings. The existing advance-ruling mechanisms of the states, therefore, offer interesting policy choices.
The policy-makers must appreciate that from a business perspective, advance-ruling mechanism presents two significant attainments over traditional dispute settlement options. The first is timely determination of tax-implications over proposed business transactions. The second is certainty of outcome in as much as tax-administration is precluded from revisiting tax-positions at a later date. These key features entail significant commercial reasons to obtain advance rulings. Thus, the design of the advance-ruling mechanism being contemplated under the GST regime must ensure against loss of these positives and insulate it from turning into an adversarial regime which other dispute settlement bodies suffer from.
Clearly, stipulating certain aspects in the proposed mechanism, such as fixing of mandatory time-lines for issuance of rulings, binding nature of rulings with limited avenues for review, etc, would further enhance the attractiveness of advance-ruling. The fact that even industry associations and third-parties are permitted to obtain rulings in some states is one critical dimension which must be favourably noted by policy-makers as a number of times the issues are better addressed on an industry platform rather than at the instance of a single tax-payer. Interestingly, Haryana’s laws provide that no tax is payable if not paid initially on account of an advance-ruling even if such ruling is reversed by a higher court at a later date. Such stipulations may further enhance the reasons for the tax-payers to obtain advance rulings. Similarly, appointment of independent members to man the authority add to its credibility as one can expect rulings not motivated by tax-administration’s perspective.
Internationally, the success of an indirect tax system—which GST is—is critically examined from the perspective of its neutrality to the tax-payer, i.e., the business entity. Mechanisms such as advance-ruling extend clarity on tax-policy and therefore carry the potential to transform them for partnering the State in its tax-collection agenda. One would accordingly hope that the incumbent officers address these aspects while designing the GST regime to institute a robust advance-ruling mechanism.
The author is leader (indirect tax), BMR & Associates LLP
With inputs from Tarun Jain