Advance ruling : Level Playing Field?
By Kapil Sharma and Shivam Mehta
A stable and certain tax regime is sine qua non for gaining investors’ trust. An advance ruling on tax liability of a business proposal is a way by which tax certainty can be ensured. While the foreign investors and select category of other persons are assured in advance of their likely indirect tax liability through the Authority for Advance Rulings (AAR), the domestic industry has been demanding a level playing field and extension of such facility uniformly to all domestic investors as well.
Budget 2013 - Proposed changes
In Budget 2013-14, the Government of India appears to have taken note of this demand and has extended the facility for advance ruling to all resident public limited companies even in respect of central excise and service tax matters.
The scope of advance rulings is also being extended to cover every new line of business or activity to be undertaken by the applicant as well as to include issues pertaining to eligibility of Cenvat credit on input services. The scope of the term ‘activity’ is being expanded to include any new business of import, export, production or manufacture for existing importers, exporters, manufacturers, producers, etc.
Hopefully this move should help India overcome the image gained in recent years among international investors, particularly with introduction of GAAR, of having an unfriendly and revenue centric tax regime. The move will also bring parity amongst both foreign and domestic investors as regards uniformity and certainty in tax administration.
So far the application for advance ruling could be filed only if an activity or service is proposed to be undertaken by the applicant. The activity could be production or manufacture in case of an application under the central excise law, import/export in case of customs and provision of service in case of service tax. The term ‘activity or service proposed to be undertaken’ has been a subject matter of constant judicial scrutiny wherein the authority has also given varied rulings. As per the existing legal provisions, an applicant is ineligible to request for an advance ruling as soon as he has engaged in such activity even once. This means that, as of now, an investor cannot seek an advance ruling even if he were to start a new business. With the proposed changes, an investor will be able to get an advance ruling in respect of a new business.
While the proposed changes would surely bring some relief to the investors, they give rise to some questions as well. For example, there could be applications already filed with the authority where the applicant has sought advance ruling in respect of a new line of business, but are still pending disposal by the authority. Will the proposal cover these applications as well? The provisions do not specifically answer this question as such. The moot point here would be whether their application should be decided based on the law prevailing at the time of filing the application or on the basis of law prevailing at the time of deciding the application.
The term ‘new business’ is not defined and the same may leave much scope for interpretation. The question is whether the new business can be a new line within the same business (e.g. new product or model) or should be a different line of business altogether. As of today there is no concrete deciding principle which may benchmarked by the investing community to decide on whether application can be filed for advance ruling on a particular issue or not.
In the context of service tax, the issue of what would constitute a ‘proposed service’ on which an investor could seek advance ruling has become more interesting under the new service tax regime with a new definition of service and taxable event. It will be interesting to see whether the authority will entertain an application seeking a ruling in respect of an on-going activity which was not covered in the earlier regime within the scope of taxable services.
Thus the success of the above move will depend, to a large extent, on how the authority will interpret the new legal provisions. If we were to go by the experience so far on how the authority has gone about its business, it cannot be said for sure that the full benefit of the proposals will be achieved. Hence there is a need for upfront clarifications from the Government of India on each of the aforesaid issues.
[The authors are Principal Associates, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]