The mechanism of Authority for Advance Ruling (AAR) was set up under the goods and services tax (GST) to provide tax clarity to companies and other assesses. However, conflicting rulings by the state-level AARs in some cases and the state-specific jurisdiction of these orders have not made them an effective way to address the queries of assessees.
To fill the gap, the GST Council on December 22, 2018, resolved to create a Centralised Appellate Authority for Advance Ruling to deal with cases of conflicting decisions by two or more state appellate advance ruling authorities on the same issue.
However, the resolution has not moved forward even after around five years.
A tax consultant said he is not "normally" advising his clients to go for AAR to get clarity. It is only when a competitor charges a lower tax rate etc that he advises his clients to approach AAR, he clarifies.
Another issue plaguing AARs is the quality of rulings. It is generally feared that AARs typically comprise deputy commissioner or joint commissioner rank of officials who give judgement in favour of authorities.
Pratik Jain, tax partner at PwC, says the AAR mechanism was aimed at providing speedy resolutions to complex interpretation issues potentially leading to disputes.
"However, given the structure of AAR and the difference of views in different states, it has not been an effective remedy. Besides setting up a centralised AAR mechanism, GST Council should perhaps look at the constitution of AAR benches," he suggests.
He further opines that one of the options could be to have the officers currently holding appellate advance ruling benches assigned to AAR. Against the order passed by this bench, the appeal could directly lie to high courts as provided under customs laws, he suggests.
Currently, appeals against AAR go to the Appellate Authority for Advance Ruling (AAAR) of the state concerned.
There are various instances of AARs or AAARs giving conflicting rulings. For instance, the Karnataka-based authority had ruled that the executive director of a company will not be liable to pay GST, but the income of non-executive directors will suffer the tax through the reverse charge mechanism (RCM). The order stirred controversy as other state AARs had held that all directors are liable to pay GST.
Normally, a person or entity providing services pays the tax to the exchequer and recovers it from the receiver of the service. However under RCM, the receiver of the service pays the tax by deducting it from the service provider's compensation.
However, in a case related to Clay Craft, the Rajasthan AAR had ruled that the services rendered by the director to the company, for which consideration is paid to the firm under any head, are liable to GST under RCM. The situation would remain the same even when the director is also a part-time director in another company. The AAR did not distinguish between executive director and non-executive director as was done by its Karnataka counterpart.
Then, there was the issue of liquidated damages. The term liquidated damages is not defined in GST law.
Where compensation is liable to be paid on the termination of a contract or on breach of any clauses thereof, and which is specifically agreed at the time of signing the contract, the said compensation would fall within the meaning of "liquidated damages".
As regards the taxability of liquidated damages, multiple divergent rulings have been issued wherein some state authorities have held that such injuries can be construed as "consideration" paid for "toleration of an act" and would attract GST.
On the other hand, some have held that damages are in the nature of compensation for loss suffered. As such, these cannot be equated with consideration for any supply as a positive act of doing something in return and, as such, would not attract GST.
There are similar conflicting rulings in relation to the taxability of canteen facilities from employer to employees, input tax credit on factory set-up expenses, taxability of intermediary services, contract manufacturing of liquor, etc.
Harpreet Singh, partner, indirect tax at KPMG India, says that with contrary rulings on these issues, it is critical that the central appellate authority is set up and made functional at the earliest. "This would save not only time and cost for industry but also may help in better utilisation of Government resources," he says.
He says that in view of contrary advance rulings, it is difficult for multinationals having operations across states to adopt a consistent tax position for all states.
"One is never sure which view a particular state AAR is going to adopt or which precedent the advance ruling authorities would follow," he wonders.
Sandeep Sehgal, partner at AKM Global, a tax and consulting firm, says that initially hailed as a boom for trade and industry, AAR under GST was established to expedite the resolution of tax disputes.
"However, the reality has been different. The divergent verdicts issued by AARs across various states have sown seeds of uncertainty, contradicting the very purpose of offering clear and predictable guidance to businesses," he points out.
This inconsistency has not only caused confusion but also disillusionment among businesses seeking GST clarity, he says.
"Consequently, many in the industry now approach the AAR with skepticism, considering the more traditional judicial routes as viable alternatives. The lack of a unified, central AAR further exacerbates these issues, underscoring an urgent need for structural reforms to realign the AAR with its intended function within the GST framework," Sehgal says.
While the centralised appellate authority would solve many of these issues, some matters still remain unresolved. A paper by consultancy firm Deloitte says setting up of this body could also lead to the reopening of settled disputes for taxpayers.
For instance, the paper says the state appellate authority gives a ruling in a taxpayer’s favour, while another state appellate authority pronounces a different ruling in a similar situation. In such a case, approaching the centralised appellate authority could have a negative impact on the taxpayer who holds a favourable order, the paper points out.
"Thus, while setting up the central appellate authority, the GST Council takes into account relevant factors to ensure that the creation of such an authority does not lead to additional disputes," it cautions.
More efforts need to be taken to make the entire mechanism effective and investor-friendly, Deloitte says.
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