Sukumar Mukhopadhyay: Make advance tax ruling a reality

EXPERT EYE

, edited by International Fiscal Association, Amsterdam, in 1996, enunciated the principle that for reasons of certainty it is useful for the taxpayer concerned to be able to obtain an advance ruling from the tax administration.

It is available in Austria, Germany, the Netherlands and Canada. In some form, it is also there in Japan, South Africa and the US. In India, in 1999 an Authority for Advance Ruling (AAR) for indirect taxes was created by incorporating Section 23A to 23H in the Central Excise Act, 1994 and Sections 28E to 28M in the Customs Act, 1962.

However, the powers and functions that were assigned to this authority are so restricted and constricted that one is reminded of Jean-Jacques Rousseau's famous words of man was born free, but has been put in chains. In the case of the AAR, the Rousseau statement applies in reverse. The AAR was born in chains and must be made free now.

The law lays down (Section 23A (c) of Central Excise and 28E(c) of Customs) that only non-resident Indians (NRI) and Indian residents setting up a joint venture with a NRI can get advance rulings. An ordinary Indian importer or manufacturer is just ruled out.

This is the basic flaw. Innumerable Indian entrepreneurs, who break their head for certainty in their tax assessment run from pillar to post. The method prescribed for them is: investigation, show cause memo, adjudication, appeal before Commissioner or Tribunal, High Court and Supreme Court. The uncertainty continues for years to come.

The issues that the authority can decide on are similarly restricted. It can only decide on classification, applicability of a notification regarding rate of duty, principles for determination of value of goods, admissibility of input credit.

It cannot give a ruling: (a) if the manufacture has already started, as decided in the case of Crystal Interior Products, 2004 (174) ELT440 (AAR); (b) if the tribunal has already decided such an issue, as laid down in the case of Permalite Electricals, 2004 (168) ELT 164(AAR); (c) if the business has already been started, as decided in the case of McDonald's India, 2004 (165) ELT 404 (AAR); and (d) if it is a question as to whether it is manufacture or not, as decided in the case of Shonkh Technologies International , 2004 (165) ELT 407 (AAR).

The other restriction is that the ruling of the AAR is binding only on the commissioner, in whose jurisdiction the activity took place.

This means that if a non-tobacco bidi manufactured without power in West Bengal is classified by the AAR as a particular tariff item, the commissioner in Andhra Pradesh where the same bidi is manufactured will simply ignore the ruling and ask the manufacturer to pay higher duty. This dilutes the authority of the AAR.

It is, therefore, not surprising that it is just in a handful of cases an actual ruling has been issued by the AAR since it became functional in May 2002.

In 2004, four rulings have been issued and in 2005, only one ruling has so far been issued and reported. It is obvious that if the scope of giving ruling is so restricted, there would be very few cases coming before the authority.

In conclusion, the AAR can function to the great advantage of the Indian importers and manufacturers if properly empowered. It would be great if this Budget could convert this authority, which is useful into powerful.

smukher2000@yahoo.com