AAR they really bad?

Any conversations I have with my clients or fellow consultants on Advance Rulings issued under GST often end up with a frustrated smile as if India has lost the World cup much before it started. Authority of Advance Rulings (AAR) is one organ of the Government which had been a favourite whipping boy of all of us for last year or so and the reasons are many:

Pro-Revenue bias

Most of the judgements are decided in favour of the revenue. Critics attribute this to the fact that the Authority is manned by Junior level officers (Joint Commissioners and above in the Central GST formations) instead of retired judges who could be expected to be impartial

Conflicting rulings

Rulings in some cases have been conflicting. Solar sector has suffered in a big way due to this as rulings by some AARs like Maharashtra, Karnataka and Uttarakhand have differed widely creating confusion in the mind of the industry whether the tax they charge should be 5% or 18% putting the profitability of the whole sector in question

Fear of audit objections

Advance rulings give a good database for the GST investigation teams to raise objections and start investigations. Cases have been reported where, based on the Vservglobal ruling, refunds are denied or duty is demanded. In this case BPO operations of an Indian company, which the client claimed as exports, were held to be Intermediary and thus liable to GST in India.

Limited jurisdiction

AAR cannot decide questions of Place of Supply which is a main issue of contention in many cases including whether a particular transaction is an export. Many AARs have refrained from passing orders in cases before them on the ground that law did not allow them to comment on Place of Supply. Some however have passed orders.

Let us now examine how far these objections are true and are they really destroying the sleep of the tax head or the CFO as claimed to be

Certainty versus revenue bias

In his budget speech in 2014 Mr Arun Jaitley had said, “ I would like to convey to this August House and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth” . In that year he went on to open Advance Rulings under Income tax to resident taxpayers too. 

One may note that, Advance Rulings under Excise and Customs were available only in case of new transactions. Which meant that once you start manufacturing or importing a product, you could not approach AAR for a decision on classification. GST saw a marked shift when continuing transactions also could be covered under Advance Rulings. This was a major change from the previous regime. Now any transaction except the one which is already decided by tax officer or which is under investigation by the the officer can be taken up before AAR. Isn’t that better?

I remember 25 years back as an Assistant Commissioner Central Excise, my tax assessees used to ask me if a product would be classifiable under chapter 73 (products of iron and steel) charged at 15% or under chapter 87 (motor vehicle parts) at 20%. For them the rate did not matter as the buyer was often an auto OEM who would get credit irrespective of the rate. I could not give a decision in writing as such decisions are not appealable if Government wanted to appeal. I then found out a circuitous route of issuing them a Show cause notice and then deciding the case so that the assesse or the department can appeal against my decision. It provided some certainty to the assesse.

25 years later, the law has solemnized the process and an officer with 10-12 years’ experience is giving a decision instead of a very junior officer freshly infused in the field, as I was in 1994.

Aren’t’ there conflicting judgement elsewhere

People who complain about the conflicting judgements forget that the GST we have adopted is a federal GST where each State is a taxing jurisdiction just like under the VAT. The only difference is that we have a single law and unified processes now unlike under VAT. AARs are therefore State specific and there are bound to be differences in the rulings. Haven’t we seen conflicting judgements of High Courts on the same issue? In fact in some cases even the Supreme Court has given diverse judgements as the litigating parties failed to bring before them the previous ruling of the same court (Those interested may refer to Madras Marine judgement of 1988 and Hotel Ashoka Judgement of 2012 on sale from Bonded warehouse and applicability of tax on such sale). Similar is the case of Tribunals. Why are we opposed to conflicting rulings by AARs then?

National Authority is not a panacea

It is a good idea to have a national Appellate authority above the AARs in the States. But that will mean that there would be delay in decisions. If National authority has benches in all States then there would be diversity in decisions as today. We often forget that Advance Ruling is not a litigation process but a quick way to bring certainty in operations. No one is forced to go for Advance Ruling unlike an adjudication process which a compulsory process of law. If we understand this, we can live with the diversity in the decisions by AARs.  

Proactive Government can do what national authority does, perhaps better

Two months back I, as a part of an industry delegation, met senior officers of the Finance Ministry including the then Revenue Secretary. One of the points raised was the conflicting rulings of the AARs in solar sector and their impact on industry. The Secretary assured the delegation that Government would try and resolve such disputes by issuing clarification to bring uniformity. In the Council meeting on 22 December, and through Notification issued on 31 December Government has clarified on the issue faced by the industry. Of course there could still be some unanswered questions around the notification but the fact is that Government is clarifying on conflicting AAR decisions and such decisions are universally applicable unlike that of proposed National AAR. Isn’t that a good news?

Fear of audit is unfounded

I feel that the fear that department will raise frivolous objections based on AAR decision is completely unfounded. Firstly, I find the quality of AAR decisions really good in most cases, though one may or may not agree with the conclusion. These orders are not arbitrary, are well reasoned and therefore build a rationale around the interpretation of the nascent GST law. An AAR ruling like one in case of Columbia Asia has opened industry’s minds to cross charges among offices of a single entity across different States though I agree there are strong points of arguments for not cross charging. If departmental audits use such objections then these will be on grounds stronger than what one had seen in the past. They will definitely be not frivolous. Industry also would be prepared for such objections as AAR decisions are in public domain and would form a kind of question bank for proposed visit of a Departmental Audit. I feel that is a good news rather than a bad news.

Typical situations where AAR is useful

I have an auto component client supplying to two of the biggest auto giants in the country. One insists that the value of mould has to be added to the taxable value of component supplied while the other says, it shouldn’t be. Caught between the conflicting views he follows different valuation methodologies for each of them. He is worried about the taxman knocking on his door one day and, even before that, the GST auditor, who may qualify his Audit Report. These could be cases where AAR is really useful.

AAR also expedites the process of decision as rulings are to be pronounced within 90 days unlike adjudication/ appeal process which takes years. The time from filing an AAR till the decision of the Appellate authority on the decision of AAR can come in less than a year and one can explore other options like writ immediately after that.

AAR is not the final word on the GST law, the right which still lies with the Supreme Court of the country. It is not binding on persons other than the applicant and the concerned officer. We are perhaps reading too much into AAR decisions and losing our sleep. On the contrary, AAR can be strategically used in many cases provided a well thought out plan is made out comparing litigation, representation and AAR. If we think AAR is a solution for all our problems then it can frustrate us, but if we look at it with an open mind there are lots of advantages one case derive for business by carefully weaving strategies around AARs. So my verdict is “AARs are not bad at all”.

(Views and opinions expressed herein are those of the author and do not reflect the views of KPMG in India.)