Sukumar Mukhopadhyay: Let's get the advance ruling set-up to work

Since the interest of the taxpayer is paramount, the Authority for Advance Ruling has to be given genuine powers to be able to function.

A litigation-oriented system suits the bureaucracy since such a system helps it to balloon itself. If the Budget wants to free taxpayers from the stranglehold of uncertainty, then it should empower the Authority for Advance Ruling (AAR) to become more useful and effective than what it is now. It has the potential to become a significantly useful organisation to the advantage of Indian importers, manufacturers and service taxpayers. But it is not, primarily due to artificial restrictions on its powers. This holds true for importers and manufacturers as well, though this piece about advance ruling for service tax "" service tax, being a new tax, has a lot less clarity, and has become the source of tremendous litigation.

Currently, the system of giving advance ruling for service tax is beset with inherent restrictions "" that's because the law is made that way. Sections 96 A and C of the Service Tax law (Finance Act, 1994) lay down that only non-residents and Indian residents setting up a joint venture with a non-resident can get such rulings. An ordinary Indian importer, manufacturer or service provider is simply ruled out. This is the basic flaw. Innumerable Indian entrepreneurs want certainty in their tax assessment. The method prescribed for them is: investigation, show cause memo, adjudication, appeal before commissioner, tribunal, high court or the Supreme Court. The uncertainty continues for years to come. This restriction should be abolished and it should be made open to all Indians. The infrastructure is much more adequate than the present workload. Not even half a dozen cases on services taxes are said to have been decided by giving a ruling, while in most of the cases the Authority has only ruled that it has no authority to give a ruling. Such cases are discussed below:

In McDonald's India Pvt Ltd 2004 (165) ELT 404 (AAR), the Authority ruled that the benefit of seeking advance ruling from it would not apply in case of an ongoing business or undertaking which has already commenced the business.

In Jason James Clemens, 2005 (181) ELT 16 (AAR), the Authority ruled that advance ruling cannot be sought on a question based on a circular issued by the Board as a circular is not a notification.

In Om Construction, 2005 (185) ELT 31 (AAR), it ruled that no ruling could be given because the applicant was a resident Indian and there was no collaboration with the non-resident.

In Kartar Singh Kochar, 2005 (187) ELT 304 (AAR), it ruled that the question whether pandals and shamianas supplied for Hindu marriages are exempted from service tax, is beyond the scope of the Authority.

In Google Online India (P) Ltd, (2006) 23 STT 44 (AAR-New Delhi), the Authority ruled that whether the classification provided by an applicant is a taxable service cannot be a subject matter of advance ruling.

The scope of advance tax ruling is now restricted only to classification, valuation, applicability of notification and admissibility of credits. The basic issue as to whether a service is taxable or not is out of the purview of the Authority. For instance, the Authority will not give a ruling on whether a telephone information service will fall under business auxiliary service or not. The scope is also limited to "service proposed to be provided". This does not cover cases of those who have already started providing a service. 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 shoe manufacturer without power in West Bengal gets a ruling as falling in a particular tariff item, the commissioner in Delhi where the same shoe is manufactured will simply ignore it. It is not, therefore, surprising that it's just in a handful of cases for which an actual ruling has been issued by the Authority in the last three years, since 2003. In 2004, four rulings have been issued that have been reported, and in 2005, just a few.

Professor Detlev J Piltz writing in 1996, in Studies on International Fiscal Law (edited by International Fiscal Association, Amsterdam) 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, Canada and the Netherlands. In some form, it is also available in Japan, South Africa and the US. In India, in 1999, an Authority for Advance Ruling 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. In 2003, this restricted system was extended for service tax also.

One reason why this restriction has continued so long is that the Central Board of Excise and Customs considers that its own power will be diluted. This thinking is precisely against the interest of taxpayers. The Board does not give binding rulings when the taxpayers ask them. So it is the taxpayers who simply suffer due to uncertainty. It is also apprehended that it should not be allowed to become a parallel organisation to the present system of appeal and so on. This is not correct because it can be extended to those who have started providing the services but have not got into litigation so far. In such a situation, it will not turn out to be a parallel organisation to the present system of adjudication, appeal and so on.

The conclusion is that the interest of the taxpayers is paramount and not of bureaucracy and legal practitioners. The powers and functions that were assigned to this Authority are so restricted and constricted that this well-equipped edifice of AAR is now unutilised and the Indian manufacturers, importers and service taxpayers are crying under the heavy load of uncertain future.

In this Budget, this crying need should be met by substantial empowerment of the Authority to become an effective institution.

The writer is former member, Central Board of Excise and Customs