Advance Ruling Mechanism under the GST law – A tool for trade facilitation?
“Advance Rulings are a means of facilitating trade, promoting transparency, consistency in approach and beyond all, providing certainty of tax liabilities in transactions – as taxes go a long way in determining the profitability of any enterprise. Well implemented advance ruling systems provide certainty to tax payers which are consistent with a taxpayer’s expectation that they shall be taxed appropriately in accordance with the law. The tax systems of the United States, the United Kingdom, Netherlands, Germany, Australia, and South Africa and many other developed /developing economies have established advance ruling practices. Read on…”
1 Historical Genesis & Evolution of Advance Rulings in India
The implementation of advance ruling in India is in line with the World Trade Organization’s (WTO) Trade Facilitation negotiations. The Authority for Advance Ruling in India is a relatively late entrant. Although the concept of obtaining an advance ruling was conceptualized by the Wanchoo Committee in the mid-1970s, it was only in early 1993 that it was implemented.
The facility to obtain a ruling was initially available only to non-residents. However, based on the needs of the domestic industry, the advance ruling system was later made available to even domestic taxpayers. Looking at its growth, the advance ruling system was introduced into the indirect tax laws too viz., Central Excise, Customs and Service Tax laws.
The advance ruling has also found its place in the GST law. On a comparison of this facility with the erstwhile laws, it can be assuredly said that the GST law has given wide applicability to the advance ruling facility. Earlier, it was only with respect to business transactions which were proposed to be undertaken that an advanced ruling could be applied for or only a certain class of taxpayers could apply for a ruling. But now, in the GST regime, a taxpayer whether or not registered, can apply for a ruling seeking clarification with respect to even its ongoing business activities as well as proposed business transactions.
2 Statutory Framework & Institutional Architecture (Chapter XVII)
Self-assessment is the preferred archetype of any taxing statute. And with the onus put on taxpayers to assess and pay taxes, advance ruling systems provide the required facility to the taxpayers and clarity on how tax would apply to their transactions. Since the implementation of GST law in India is relatively new and uncertain, there has been a brisk inflow of applications seeking clarifications on the applicability of the provisions of the law.
The legal framework for the advance ruling mechanism is contained in Chapter XVII of the Central Goods and Services Tax laws. The advance ruling mechanism is uniquely set up in India with the Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR) set up in each State / Union Territory through the respective State GST laws.
Structural Deficiencies & Institutional Revenue Bias
This State-level setup is a significant departure from the setup in earlier regimes wherein only a single advance ruling authority was present. Due to this, there are divergent interpretations for the same legal provision by different State AARs, leading to severe challenges for businesses to gain clarity and adhere to the law.
The AAR and the AAAR consist of an officer each from Central and State Tax. The presence of only officials from the tax department with no members having judicial experience drags down the purpose of having the advance ruling mechanism – as the pro-revenue bias is quite evident in the decisions.
National Appellate Authority for Advance Ruling (NAAAR) – The Unnotified Solution
To address conflicting decisions taken by various State AARs/AAARs and to eliminate revenue bias, the GST Council approved the creation of a central appellate authority known as the National Appellate Authority for Advance Ruling (NAAAR), equipped with a member having judicial experience. Enabling provisions have been inserted into the GST law since 2019, but the same are yet to be notified, rendering it a toothless provision without judicial blessing.
3 Permissible Scope of Advance Ruling (Section 97(2))
An advance ruling can be sought strictly within the boundaries of the seven prescribed subject matters under Section 97(2) of the CGST Act:
- (a) Classification of any goods or services or both;
- (b) Applicability of a notification issued under the provisions of this Act;
- (c) Determination of time and value of supply of goods or services or both;
- (d) Admissibility of input tax credit of tax paid or deemed to have been paid;
- (e) Determination of the liability to pay tax on any goods or services or both;
- (f) Whether applicant is required to be registered;
- (g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.
The Place of Supply Conundrum – Sutherland Mortgage Services Landmark Ruling
Questions involving determining ‘place of supply’ have conspicuously been left out of Section 97(2). Consequently, applications seeking clarification on place of supply were routinely rejected by AARs citing lack of jurisdiction.
In this landmark case, the AAR rejected an advance ruling application relating to the place of supply issue. On writ petition, the Hon’ble Kerala High Court laid down the correct legal position, observing that tax authorities must endeavor to provide certainty of tax liability to taxpayers so that they can arrange their business affairs accordingly. The High Court held that the place of supply issue squarely falls under the purview of Section 97(2) (as it impacts determination of tax liability under clause (e)) and remitted the case back to the AAR for fresh decision.
Proposed Activities & Flawed Rejection: Saint-Gobain India Case
Advance ruling is explicitly applicable to activities proposed to be undertaken. In the case of Saint-Gobain India Private Limited [2020 (7) TMI 260 – AAR Maharashtra], the applicant proposed to manufacture Glass-fibre reinforced Gypsum Board and sought clarification on the applicable GST rate. Because samples of the proposed product could not be produced during hearing, the AAR rejected the application on the ground that the product was presently not in existence. This defeats the very rationale of advance rulings, as an applicant approaches the AAR precisely to determine commercial viability prior to committing investment.
Crucial Exclusions under Section 97(2) & Lack of Appeal against Summary Rejection
Certain critical areas are not covered under Section 97(2), including: (i) ITC reversals, (ii) applicability of interest, (iii) transitional credit (TRAN-credit), and (iv) documents to be issued. If an application touches these excluded domains, it is rejected without entering into merits.
No Appeal to AAAR under Section 100: Section 100(1) allows appeal to AAAR only when aggrieved by an advance ruling pronounced under Section 98(4). It provides no appeal against an order of rejection under Section 98(2). Consequently, the applicant’s sole recourse is to challenge the rejection by filing a writ petition for judicial review before the High Court.
4 Procedural Timelines & The Threat of Divergent Rulings
The statutory time limit prescribed under the Act is 90 days from the date of filing the application or appeal. While these slim timelines were intended to ensure swift certainty, ground realities reveal that they are routinely bypassed, causing protracted delays that cost businesses critical commercial opportunities.
Furthermore, contradictory rulings pronounced by various State AARs add to the woes of stakeholders, threatening the core constitutional objective of “One Nation, One Tax”. Prominent examples of divergent rulings include:
Delhi AAR ruled that supply of food and beverages in trains would be taxed at rates applicable to each individual item, directly disregarding a departmental Circular specifying a uniform 5% rate.
Maharashtra AAR levied GST @18%, whereas Karnataka AAR applied 5%, creating confusion across renewable energy developers.
Kerala AAR held ITC on demo cars admissible, whereas Goa AAR and Maharashtra AAR categorically denied ITC.
Telangana AAR classified supply of printed trade advertisement as supply of goods. On identical facts, West Bengal AAR & AAAR classified it as supply of services.
Maharashtra AAR ruled penal interest on loan default/cheque bounce liable to GST, deviating from Section 15. The CBIC intervened via Circular No. 102/21/2019-GST dated 28th June 2019 clarifying penal interest is exempt.
Karnataka AAR held hotel accommodation provided to SEZ guests as taxable intra-state supply. CBIC had to release a Circular in June 2018 clarifying such services to SEZ are zero-rated inter-state supplies.
Contradictory rulings between Karnataka AAR and Rajasthan AAR led to nationwide tax demands on directors’ remuneration until CBIC issued a circular settling the controversy.
5 Bar of Pending Proceedings & Finality of Rulings
Overbroad Connotation of ‘Pending Proceedings’ (Section 98) – Tirumala Milk Case
Section 98 prohibits admission of advance ruling applications where the question raised is already pending or decided in the applicant’s case under any other provisions of the Act. Authorities have given the term ‘proceedings’ an excessively wide interpretation to dismiss genuine applications.
Binding Nature & Scope of Judicial Review: JSW Energy Landmark
The GST law provides an appeal from AAR to AAAR, but no further statutory appellate forum exists against an AAAR order. This led taxpayers to challenge AAAR rulings before High Courts under Article 226/227 of the Constitution of India.
The Hon’ble Bombay High Court refused to interfere with the AAAR’s order, ruling that merely because the statute does not provide a further remedy of appeal, it does not become a fit case for appeal before the High Court. Converting writ proceedings under Article 226/227 into appellate proceedings is impermissible. Under judicial review, the High Court only examines the correctness of the decision-making process, and not the correctness of the decision itself. Consequently, AAAR orders are practically final and binding on merits.
6 Parting Thoughts & The Role of Professional Craftsmanship
The advance ruling mechanism was conceived to provide transaction certainty so businesses can plan investments factoring in tax costs. To realize its true potential:
- Administrative Reforms: AARs must act as trade facilitators, incorporate judicial members in their constitution, adhere to the 90-day statutory timeline, and consider withholding public publication of individual rulings to prevent market confusion.
- Professional Craftsmanship: Being judicious is not the responsibility of authorities alone. Presenting an application before the AAR is as crucial as arguing before a Court. Meticulous preparation demonstrating complete facts and procedural completeness is vital. Given the binding and near-final nature of rulings, professionals must thoroughly evaluate all legal nuances before approaching the AAR, as an unfavorable ruling cannot be easily discarded.