A recent ruling by the Maharashtra Authority of Advance Rulings (AAR) could upset a large part of India’s back office business, and highlights the importance of tax authorities—in this case, the GST Council—being proactive and examining the impact of various rulings and immediately clarifying the position on them through a notification.
A recent ruling by the Maharashtra Authority of Advance Rulings (AAR) could upset a large part of India’s back office business, and highlights the importance of tax authorities—in this case, the GST Council—being proactive and examining the impact of various rulings and immediately clarifying the position on them through a notification. In the case of solar panels, for instance, while the Maharashtra AAR says they must pay a GST of 18%, the Uttarakhand AAR has ruled that a 5% tax level is the correct one.
In the present case, an overseas company had given an Indian firm a contract for post-sale documentation; a quintessential back-office deal. Since this involved the Indian company contacting third parties, the AAR ruled that the Indian firm was an “intermediary”—someone that facilitates a transaction, like a broker—and so needed to pay an 18% GST instead of the zero tax that are levied on exports. Since the Indian firm’s work involved the post-sales period, it is unclear how its services could be considered equivalent to those of an intermediary or broker trying to facilitate a sale.
No AAR ruling, it is true, applies to other companies—it is applicable only to the firm to whom it is given—and, to that extent, this has no larger implications. But if other taxmen start using the same principle, a lot of other back-office work that doesn’t get taxed right now—as it is considered an export—could be subjected to GST. If, say, a US firm contracts an Indian firm to look after its receivables and, as part of this process, if the Indian firm contacts the US firms’ clients, the taxman could consider this to be an intermediary’s work rather than a part of an export contract. An 18% tax, needless to say, could dramatically reduce India’s competitiveness and also cause a large loss in export contracts.
Ideally, instead of having an AAR bench in each state—manned by both state and central officials—there should be one pan-Indian AAR. But if this is not possible in a federal system—most states would feel slighted were this to happen—the GST Council has to evolve a system to examine the import of each ruling from different AAR benches and come to a common position on it.
Also, as a general rule, it may also be a good idea to move from the position of staffing the AAR with just tax officials to one where retired judges serve on these benches. The idea of the AAR is to give rulings that help end disputes, but since the rulings are mostly against companies, they end up going to court anyway—rightly or wrongly, tax officials are seen as biased in favour of the taxman; so in order to remove bias, a retired judge heading the AAR would bring in the much-needed objectivity.