In 1991, when the Indian economy opened up, it was applauded as a new dawn. A breakaway from the infamous license-raj, it promised a liberalised, transparent and investor-friendly India. Amongst the slew of measures taken by the government to boost investor confidence, a remarkable one was notifying the Authority for Advance Ruling (AAR) under income-tax law in 1993: a quasi-judicial forum through which prospective investors could obtain a tax ruling on future transactions.
The AAR was conceived as a body which would provide binding decrees – preventing inadvertent defaults of tax and thereby years of litigation. Inherent to the AAR was its impartiality, signified best by the fact that it was presided by a retired Supreme Court judge. The AAR was, suffice to say, successful in serving its intended purpose. Non-resident investors actively approached the Authority with difficult questions of fact and law, reassured that their submissions would be heard and considered impartially. Encouraged by this success, advance rulings were thereafter introduced for customs and excise matters in 1999. This was further extended to service tax matters in 2003. Notably, the structure of the income-tax AAR was retained – with a retired judge of the Supreme Court as the Chairman. Both AARs are responsible for various landmark rulings through the years. Over the years, they helped bridge the gap between the conflicting interests of the taxpayer and the revenue in an amicable, non-litigative manner – a relief for the already overburdened courts and tribunals. In all of this, the AARs also emerged as bodies specially geared towards addressing the tax implications of increasingly complex transactions.
Naturally, one would expect that these tools, which had helped build investor trust, provided taxpayer certainty and eventually contributed to growth would come to be expanded and evolved. The last few years, however, have had a different story to tell.
The first change in policy was showcased by the new advance ruling authority as constituted under GST. This AAR altogether did away with the requirement of a presiding retired judge or even an independent judicial member. Instead, it came to be comprised only of high-ranking government officers. Soon enough, this regression was taken over to other regimes – starting with the replacement of the AAR for customs with a Commissioner/Principal Commissioner (as a ruling member) in 2018. The option of appeal from the same was also removed in 2021 as part of "rationalisation of Tribunals". The AAR for income-tax was also made defunct and replaced with the "Board of Advance Rulings" (BAR), which consists only of revenue officers. The ostensible reason given for this change was the non-availability of eligible persons (retired judges of the Supreme Court, Chief Justices of High Courts and other judges of High Courts who have served for seven years or more).
Notwithstanding the intent behind these changes, it has struck a devastating blow to the primary goals of advance rulings, i.e., providing confidence in the fairness of the system and bringing certainty to taxpayers, especially to the ones outside India. The perception of AARs as a neutral forum is now compromised with advance rulings left entirely in the hands of revenue officials. Contrary to the very purpose of advance rulings, this only opens more avenues for litigation. Time and again, the Supreme Court, especially in the context of tribunals, has reiterated the importance of neutral judges who are independent from executive control and trained to judicial thinking. This also extends to AARs, which were endowed with judicial functions and more important, the taxpayers' trust.
In addition to structural changes, there has also been a move towards making the rulings non-binding. Rulings of the new BAR under income-tax for example, are not binding on either the taxpayer or the revenue. A similar move is now proposed in the Finance Bill, 2022 for the Customs AAR, by which the validity of its rulings will be limited to three years only – too small a time frame to offset the costs and risks of obtaining the advance ruling. These reduce the function of the AAR to a merely advisory body and take away any hopes the taxpayer might have towards certainty.
The instances point towards a gradual (and steady) weakening of the structure of advance ruling authority and a dilution of its independence. As they stand today, the AARs do not appear to inspire any confidence of the taxpayer. Ironically enough, these changes which undermine the AARs have come after the WTO Agreement on Trade Facilitation signed at Bali (to which India is a signatory), which specifically mandates a system of advance ruling as part of a modern and efficient tax procedure. Our Government seem to be thinking otherwise though.
The authors thank Ajitesh Dayal Singh, Associate at Economic Laws Practice for his inputs.
The article has been published in Business Today.
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