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Advance ruling under indirect tax
December, 12th 2011

Authoritative and binding advance rulings allow traders and investors to make business decisions regarding taxes and duties, in a stable and predictable environment. Advance rulings lend transparency and predictability to the tax environment, and have thus emerged as a valuable tool for achieving certainty in tax positions.

While in many countries, the concept of advance ruling has been introduced for existing tax payers, the idea was first pioneered in India in 1993, to offer a forum to non-residents for resolving questions pertaining to proposed transactions, and was limited to direct taxes only. It was only in 1999, that the concept of advance rulings was extended to Central Excise and Customs, and, in 2003, to Service Tax.


Since inception, the ambit of advance rulings, as applicable to indirect taxes, has been widened with the years, and the categories of persons who can seek an advance ruling (as it stands today), under both the direct and indirect tax regimes, is as follows. It is clear that a far more expansive category of persons is eligible to seek advance rulings under direct tax vis--vis indirect tax.

Categories under direct tax regime:

(i) A non-resident

(ii) A resident in relation to a transaction with a non-resident

(iii) Residents notified by the Central Government

(iv) Public sector companies, where notified

Categories under indirect tax regime:

(i) A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident

(ii) A resident setting up a joint venture in India in collaboration with a non-resident

(iii) A wholly-owned subsidiary Indian company, of which the holding company is a foreign company

(iv) A joint venture in India

(v) Residents notified by the Central Government

(vi) Public sector companies, where notified

However, despite the fact that the category of eligible applicants for advance rulings has been expanded from time to time, the response of the trade and industry has been, to say the least, lukewarm'. This is evident by the fact that the Authority for Advance Ruling set up for indirect tax matters has received only 146 applications, since its inception till March this year.


It is interesting to note that in complete contrast to the above, the Authority for Advance Ruling set up to look into direct tax matters has been much more successful, in terms of the number of applications received and the general perception in the trade and industry. One of the biggest reasons for this disparity apart from the eligibility criteria is the difference of scope of Advance Rulings, as available under direct tax vis--vis the indirect tax regime.

Questions pertaining to direct tax:

1. No specific provisions specifying the nature of questions that may be raised.

2. Advance ruling can be sought on a question of law or fact relating to a transaction which the applicant has undertaken or proposes to undertake.

3. Specific prohibitions in the case of questions already pending before other authorities.

Questions pertaining to indirect tax:

1. Can be sought only on questions relating to classification, valuation, applicability of notifications, admissibility of CenVAT credit, and determination of liability to pay tax.

2. No other questions covered.

3. Can be sought only for transactions proposed to be undertaken.

Every year, the Central Government introduces amendments to the various indirect tax laws in the annual budget. Some of these amendments have, in the recent past, specifically under the service tax regulations, stirred huge debates, and have led to litigation at multiple levels, primarily due to the difference in interpretation by the tax payer and the revenue authorities.

If the scope of the advance ruling mechanism included within its ambit applications in relation to ongoing transactions, some of this litigation could have been limited, specifically in cases of classification of services, applicability of notifications, and issues pertaining to dual taxation under Service Tax, as well as Value Added Tax.

Given the increased litigation in indirect taxes, the Central Government, in the coming budget, should sincerely reconsider the recommendation of aligning the provisions relating to advance ruling under indirect tax laws, with the scheme prevailing under income tax. This would go a long way in not only reviving the confidence of the taxpayers, but also in realising the full potential of the system.

(The author is a senior tax professional with Ernst & Young, India. The views are personal.)

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