Illusory Solutions by Advance Ruling Authorities

Who does one approach when they are unsure about their tax liability under the Goods and Services Tax (GST) law? One reason why tax statutes are complex is because they contain numerous provisions. Not only does this make the law difficult to read and interpret, but it ensures ambiguity. Tax law is susceptible to inadvertent omissions. For example, there is no clarity in the GST statutes on whether "lottery and gambling" ought to be taxable as goods (since actionable claims are treated as goods) or as services. [1]

When there are no clear answers in a statute, one may consider approaching an advance ruling authority. This is an authority that is gives a ruling to the question regarding an applicant's tax liability. The fact that this is a separate mechanism from the authorities for appealing against an order to pay tax/interest/penalty means that this authority should provide a different benefit to taxpayers than the appeal mechanism. In other words, an advance ruling should help a taxpayer avoid unnecessary appeals from final tax assessment order and penalty/interest payments, by clarifying in advance what the liability of a taxpayer engaging in a particular transaction would be.

An advance ruling is undoubtedly helpful in clarifying technical aspects of tax liability. If an importer were unsure about the classification of a product[2], they may find it useful to approach an advance ruling authority. The members of an advance ruling authority are tax officers, who are sufficiently experienced in the way the revenue department would handle such technical aspects (in this example, they have sufficient experience on classification of goods). If a taxpayer does not object to an advance ruling, the clarification would ultimately have been helpful in resolving a potential dispute about tax assessment.

But what if a taxpayer refers a question that a tax officer is unable to readily answer? All questions that can be referred to advance ruling authorities in India involve, to a certain degree, questions of law [3]. There are no adverse consequences when a question that is referred to an advance ruling authority has been settled earlier by courts of law - tax officers would be helping the applicant in clarifying the position. But when the question is based on a disputed area of law, an advance ruling authority is not the appropriate forum to issue a ruling on that question. This (a decision of the advance ruling authority is in direct contradiction with the law) is an example of the outcome of legal interpretations made without necessary expertise or experience in handling unprecedented areas of dispute. These kind of outcomes are undesirable because an advance ruling will be binding on the specific transaction referred to it. It is true that the decision of an advance ruling authority can be appealed against to an appellate advance ruling authority. If neither the original nor the appellate advance ruling authority can decide on a particular referred question, it shall be deemed that no ruling can be given on the question [4] (in other words, the taxpayer is on his own now). But if both authorities agree on a particular interpretation, and that interpretation is contrary to law, then an applicant may have to challenge the ruling under regular appeals procedure. Either way, a taxpayer has to ultimately head to the appeals mechanism, making the advance ruling authority redundant in a significant number of cases. Taxpayers do not know how to distinguish their query about their tax liability from unresolved questions under tax law. A tax professional (such as a chartered accountant or an advocate) cannot obtain any helpful information from the authority on their client's tax liability. Given the risk that advance ruling authorities may increase tax liability because of ham-handed interpretation, one might prefer instead to wait for an assessment/ demand notice and formally appeal against it. A tax system is inefficient when it forces taxpayers and professionals to wait for trouble before seeking help.

Note 1 - On the issue of why the classification of a taxable supply of "goods", "services" will have different tax consequences - and why lottery can be defined either as goods or services - see the Training Manual published on Goods and Services Tax law for Probationers of the Indian Revenue Services (NLSIU; 2018) co-authored by Prof.P.R Chandrashekaran (Retired, IRS) and Ms.Roopashi Khatri.

Note 2 - Under customs law, classification of all imported and export goods is based on the HSN (Harmonized System of Nomenclature). This system divides all possible goods into categories and assigns an HSN code to specific groups of goods. Roughly speaking, the tax rate is specified against eight-digit HSN codes. Since different HSN codes may have different tax rates, a disputes may arise when a taxpaying importer does not agree with the revenue department about the HSN code applied to imported goods.

Note 3 - Section 97(2), Central Goods and Services Tax Act, 2017.

Note 4 - Section 101(3), Central Goods and Services Tax Act, 2017.