Advance Ruling under Direct Tax Vs. Indirect Tax - A Comparative Analysis

In the Indian environment, the Authority for Advance Ruling (AAR) has emerged as an important quasi-judicial system providing important rulings in tax matters. But some people get really confused when they listen about the Authority for Advance Ruling as recently it had been very much talked about and all that because of GST. So, Is it only an authority for GST Law? Is it an Authority which also takes up the cases of Direct taxes viz. Income tax? Well, all you need to do is just go through this article and you won't be confused anymore. So, Let's understand what is it:

1. WHAT IS ADVANCE RULING?

An advance ruling helps the applicant in planning his activities which are liable for payment of Taxes, well in advance. Any advance tax ruling is a written interpretation of tax laws. It is issued by AAR to corporations and individuals who request for clarification of certain tax matters. It also brings certainty in determining the tax liability, as the ruling given by the AAR is binding on the applicant as well as Government authorities. Further, it helps in avoiding long drawn and expensive litigation at a later date.

While in many countries, the concept of Advance Ruling has been introduced for existing taxpayers, 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.

Important Amendment:

With a view to promote ease of doing business, it has been decided by the Government to merge the Authority for Advance Ruling (AAR) for income-tax, central excise, customs duty and service tax. Accordingly, necessary amendments have been made to Chapter XIX-B to allow the merger of these AARs.

Thus, below are also added under the definition of applicant by amendment carried out via Finance Act, 2017 in Section 245N:

• an applicant as defined in section 28E(c) of the Customs Act, 1962.
• an applicant as defined in section 23A(c) of the Central Excise Act, 1944.
• an applicant as defined in section 96A(b) of the Finance Act, 1994.

2. AUTHORITY FOR ADVANCE RULING (AAR) UNDER GST:

Chapter XVII of the CGST act, 2017 deals with the provision relating to Advance Ruling.

Section 96 of CGST Act, 2017 prescribes the Authority for Advance Ruling (AAR). This section provides that the Authority for Advance ruling constituted under the provisions of the SGST ACT/UTGST ACT shall also be deemed to be the authority for Advance Ruling.

When can one request for GST Advance Ruling?

Any taxpayer can request for Advance Ruling when he is uncertain of the provisions. Advance tax ruling is applicable on -

(a) Classification of any goods and/or services under the Act
(b) Applicability of a notification which affects the rate of tax
(c) Determination of time and value of supply of goods/services
(d) Whether input tax credit paid (or deemed to be paid) will be allowed
(e) Determination of the liability to pay tax on any goods/services
(f) Whether the applicant has to be registered under GST
(g) Whether any particular thing done by the applicant regarding goods/services will result in a supply.

3. AUTHORITY FOR ADVANCE RULING (AAR) UNDER DIRECT TAX:

A resident taxpayer may have some taxation issues in respect of a transaction which has been undertaken or proposed to be undertaken with a non-resident. Similarly, a non­resident may have some taxation issues in respect of the transaction which has been undertaken or proposed to be undertaken by him in India. In order to get clarification on taxation of those transactions, a person can make an application to the Authority for Advance Rulings (‘AAR'). Provisions relating to advance ruling are provided in sections 245N to 245V.

Advance Ruling means to determine the tax issues in relation to;

• Transactions done or to be done By Non-Resident Applicant;
• Tax Liability of a Non-Resident arising out of the transaction done or to be done by Resident Applicant with Such Non-Resident.
• Tax Liability of a Resident applicant notified by Central Govt. (i.e. Big Residents whose Tax Liability Involved in such txn. are 100cr. or more)
• Computation of Total Income of Public Sector company (notified) in case of any issue which is Pending before Income Tax Authority or ITAT. [But it should not be pending before Court otherwise application would be rejected]

4. SUMMARY CHART OF ABOVE DISCUSSION: to have a quick grasp and better understanding let's understand it in a graphical way:

AAR UNDER DIRECT TAX LAW AAR UNDER INDIRECT TAX LAW

Note: Under the indirect tax, ARA can be sought for the transaction which is proposed to be undertaken. Although in Income tax Transaction undertaken or Proposed to be undertaken both can be taken for Advance Ruling.

5. CONCLUSION: The AAR is common for the both the tax laws i.e. Direct Tax viz. Income Tax and Indirect Tax. It is Only the type of APPLICANT and Type of CASES (which can be taken in AAR) which are different in Direct Tax and Indirect Tax. The Advance Rulings are governed under Section 245N to 245V in Income Tax Act, 1961. While in Case of GST it is governed under Section 95 to 106 of the CGST Act, 2017.

Over the time the tax laws has been so complex and complicated due to several amendments, several case law and many other notification/circulars etc. Therefore, to avoid litigation after the transaction, the government has set up the AAR. They are like the advisors who are authorized to suggest the assessees who are going to undertake any transaction. And for making stakeholders more convinced AARs have been vested upon certain power and authorities and their rulings (decisions) are like a judgement but that are applicable ONLY for Assessee and their On his/her Jurisdictional Officer (but only in respect of such assessee). That is RULING OF AAR IS CASE-SPECIFIC.

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