The Centre proposes to revamp the advance ruling mechanism under the GST by setting up a centralised authority to address the issue of contradictory orders passed by the Authority for Advance Rulings (AAR) in different states.
Sources said that though the plan is to replace the AARs with a BAR (Board for Advance Ruling) located at the central level with operational centres in Delhi and Mumbai, the state-level AAR mechanism may continue for some time with the BAR coming into play in matters where contradictory orders on applicability and quantum of tax have been given on same or similar items.
A case in point of confusion created by AARs is a recent ruling of the Karnataka AAR that said an executive director of a company is not liable to pay GST, as being an employee of the company, his work does not quality as supply under the CGST Act.
But a non-executive director is a not an employee, so his inputs would qualify as service and liable for GST through reverse charge mechanism. This stirred a controversy as other state AARs had held that all directors of a company are liable to pay GST.
There have been numerous other instances in the past, where AARs, manned by tax officials, have giving conflicting orders.
A centralised board is expected to address the problem as its ruling on same and similar applications would be one without generating conflicts at the state level over applicability of taxes.
A scheme of advance rulings was incorporated in the Indian jurisprudence for avoiding disputes regarding the determination of tax liability as well as to provide tax certainty. The ruling pronounced by the AAR on an application made by taxpayers is binding in nature on the applicant for the transaction in relation to which the ruling had been sought as well as on the Principal Commissioner or Commissioner, and the subordinate income tax authorities.
Under Goods and Services Tax (GST) law, every state is required to set up an AAR comprising one member from the central tax department and another from respective state.
Sources said that if the government decides to alter or remove AAR mechanism, it would need to amend the GST Act and each state government would also have to agree for one centralised authority. Alternatively, if a centralised system of BAR is set up comprising retired judges and helped by state and central tax officials, it could co-exist with AARs and act like an appellate body to give the final word on contradictory orders.
The Finance Act, 2021 introduced amendments in the Income Tax Act, 1961 to replace the existing AAR with the BAR. To move a step forward in achieving this objective, the Centre also constituted a board for pronouncing advance rulings. But no effective date for replacing the AAR has been given.
The constitution of the BAR is a first step towards the transition from the AAR to the BAR. Three boards are proposed to be constituted with two headquartered in Delhi and one in Mumbai. Although the Centre has taken its first step, clarity is awaited in terms of scheduling hearings by the BAR, members on board, fresh application filings with the BAR in terms of prescribed forms for filing the application and similar issues, a PwC tax report has said.
(Subhash Narayan can be contacted at firstname.lastname@example.org)