The introduction of Goods and Service Tax (‘GST’) from 1 July 2017 was a biggest tax reform in India since independence as GST had subsumed majority of key indirect taxes which were there in system since decades. GST has also made substantial change not only on taxability of the goods/ services, but also the time when the same would be taxable and also, the rate at which the same would be taxable. While the Government have tried to provide as much of clarity by issuing various tweets/ circulars/ FAQs, having said so, the initial days were bound to bring in uncertainty and confusion in the minds of tax payers.
Given the completely new law and uncertainty as well as contradictory opinions/ tweets, etc. on various issues, the honest and tax compliant Assessee left with only one option of filing of Advance Ruling application so that he should not be seen as a non-compliant Assessee in future. The Advance Ruling mechanism provide a forum whereby any person may approach to the Advance Ruling Bench (‘ARB’) to seek an answer to the question regarding tax position such as applicable tax rate, taxability, valuation, etc.
Even-though there was immediate urge of setting up Advance Ruling Bench, there was a considerable delay in setting-up Advance Ruling bench by the Government. The Bench is few States were set-up sometime in mid of October 2017 only. One of the issue with Advance Ruling Bench is that it’s composition of members. Unfortunately, the Advance Ruling Bench is having officers only from State and Centre Government and does not have any ‘judiciary members’. Given the composition of members, it was a more than certain that any application filed with the advance ruling bench is going to be decided in the favour of revenue irrespective of issue under consideration.
If we look at recent Advance Ruling issued by Maharashtra Advance Ruling Bench in case of Bajaj Finance Limited in respect of taxability of penal interest, the said ruling adopts a position that appears contrary to the approach adopted since inception of the indirect tax by the ALL financial service industry. The said ruling goes one step ahead and differentiate between the ‘penal interest’ and ‘interest’ and concludes that only interest is exempted and not penal interest even though there is no differentiation in Indirect tax regulation for the same. The said rulings decided taxability of penal interest on the premise that penal interest received by the applicant is for tolerating an act of their customer for delay/ default in payment of EMI. If this position is to be accepted, then the financial industry is likely to be flooded with the demand of service tax from 1 July 2012 on penal interest.
Penal interest is not the only issue. Also, in case of ‘Columbia Asia Hospitals’, a service provider having multiple-state presence, the Karnataka advance ruling bench held that the applicant must pay GST on salaries paid to employees at the central unit or head office as they provide (supply) services to its units in other states. Given the Advance Ruling, almost all leading lawyers/ tax experts have unanimously found the ruling not just bad in law but equally difficult to implement.
Also, inconsistencies in Rulings given by the different Bench in different States have made life tough for the tax payers. For eg the ARB-Uttarakhand and ARB-Maharashtra for rate of tax on solar power generating system, ARB-Karnataka and ARB-West Bengal for availability of exemption to Indian Institute of Management under Notification 12/2017 for education services.
The ARB were set-up to provide taxpayers clarity on their future tax liabilities to minimise future litigation, however, the way rulings have been issued, I am more than sure that the industry players will not be encouraged to approach the Authorities for advance rulings. While the media reports suggest that the Central government is planning to set-up centralized/ four regional advance ruling benches, however, there is no clarity on the timelines or current status of the same. This delay in streamlining the advance ruling system would create more chaos and thereby hamper the ease of doing business in the country.
Having said so many tax experts believe that advance ruling is fastest option to reach out to the High court and hence, depending on the issue under consideration, one may decide whether is it worth exploring an option of Advance Ruling.
(The views expressed are strictly personal)