In July 2017, India witnessed the introduction of the goods and services tax (GST), which has since been dubbed one of the country’s most radical economic reforms. Given the magnitude of the change, initial teething issues were inevitable.
While the industry took on the mammoth task of making itself GST compliant, the government of India also demonstrated a degree of pro-activeness that was widely appreciated. Since its inception, many changes have been made to the law, to address the industry’s concerns.
Now that the GST is a year old, the primary expectation from the government is to bring about stability to the indirect tax framework. The recent contradictory decisions passed by the Authority for Advance Rulings (AAR) have only added to the woes of stakeholders.
AARs are quasi-judicial bodies that taxpayers may approach to seek clarity regarding the correct interpretation of GST provisions. Such clarifications may be sought on matters including classification of goods/services; determination of time or value of supply; determination of liability to pay tax; and registration requirement.
Each state/Union territory is required to set up an AAR under its GST Act.
The AAR mechanism has been recognized as a powerful tool that plays a vital part in according certainty to contentious issues and preventing long, expensive litigations.
However, some of the AAR orders passed under the GST display a general trend of a bias in favour of revenue considerations and appear to violate basic legal principles. Moreover, there is an apparent lack of consistency between orders passed by various state AARs.
Recently, the Delhi bench held that supply of food and beverages in trains would be taxed at the rate applicable on each such item. This decision was passed despite there being a departmental circular specifically stating that tax at the rate of 5% would be charged in all such cases.
In another surprising outcome, the Delhi AAR held that GST would be levied on supplies made by duty-free shops. This view too is in stark contrast to the special status granted to duty-free shops universally.
Another issue that left the industry utterly confused was the rate of tax applicable on installation of solar plants. The Maharashtra AAR applied a rate of 18%, while the Karnataka AAR applied 5%.
Given that GST is still at a nascent stage, AARs are being approached with ambiguities that have a deep-rooted impact on taxpayers and the development of GST alike. While AAR orders are binding only on the applicant and the jurisdictional authority, due to the absence of judicial precedents under GST they play a crucial role in steering the interpretation of the law. They are intended to help taxpayers understand the scope and meaning of various provisions of the law, consequently according them with a sense of certainty. Inconsistent orders, however, defeat this purpose.
One of the primary reasons for these flawed AAR orders seem to be the composition of the authority. As per the GST law, the authority constitutes one officer of the Central tax department and one officer of the state/Union territory tax department. The appointment of only tax officers on the AAR creates a conflict of interest and results in an inherent prejudice that tips the scale in favour of revenue considerations and against the taxpayer.
Further, the faulty application of legal principles in some rulings can perhaps be attributed to the low qualification threshold for AAR members under the GST law. The Central GST rules mandate the appointment of officers of the rank of joint commissioner or above.
To draw a comparison, AARs under customs law constitute a chairperson, who is a retired Supreme Court judge, an officer of the Indian customs and central excise service who is qualified to be a member of the board, and an officer of the Indian Legal Service who is qualified to be an additional secretary to the government of India. While a strict comparison of the two provisions might be unfair as the customs law AAR is a Central- level authority and the one under GST is a state-level authority, it is still indicative of the fact that the bar to qualify as a member of the GST AAR should be set higher than it is at present.
AARs are required to align taxpayers’ interest with the intention of the law, now more than ever as GST is in its formative stage. Thus, only the most competent persons, equipped with adjudicatory skills and experience, should be tasked with this responsibility.
Another menace that has plagued the AAR mechanism is inconsistency between orders passed by the authorities of different jurisdictions. The government may explore the option of setting up a Central AAR to take up such divergent rulings suo motu, on referral, or on appeal to finalize the position.
The AAR scheme, if properly implemented, can reduce the likelihood of litigation for taxpayers. However, inconsistencies in the rulings could prove to be counterproductive. In our view, to restore the public’s faith in the AAR mechanism and cement positions under GST, policy changes in this department should be a top item in the government’s list of priorities for the next GST council meeting.
Vidushi Gupta is a tax research fellow at Vidhi Centre for Legal Policy.
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