After the introduction of GST, it has become very common for the media to cover the recent updates in GST Law& decisions of the GST Council. In addition to these, the media also widely discusses the recent rulings pronounced by the various State Authorities of Advance Rulings. Not only have these rulings become a hot topic for discussion in the Industry who are forced to rethink their key business processes in light of such rulings, at times these rulings also become trending content for netizens on social media. To the Revenue Department, these rulings, not are nothing short of the gospel truth and become a decisive factor for initiating action against the assesees. The tax consultants on the other hand scramble to decode these rulings and suggest the next course of action to their clients. Some of the recent advance rulings which became a subject of wide discussion are as under:
GST @ 18% is applicable on ready to eat Parottas.
Winnings from horse racing is taxable under GST.
Tax under reverse charge is payable on Director's Remuneration.
GST is applicable on service provided by employees of one branch to another branch of the same Company.
The rulings by the Appellate Authorities in these matters were also widely discussed and debated.
In view of above, the key question that needs to be answered is whether these advance rulings are being given undue weightage?
What is an advance ruling?
Section 95 of the CGST Act defines the term advance ruling to mean a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of section 97 or sub-section (1) of section 100, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant.
Thus, an advance ruling is merely a decision by the Advance Ruling Authority (AAR) on the specific question asked by the applicant in relation to the supply of goods or services or both either being undertaken or proposed to be undertaken by such applicant. Further, it also includes the decision of the Appellate Authority of Advance Ruling (AAAR) in an appeal against any decision by the Advance Ruling Authority.
Constitution of AAR & AAAR and relevance of their rulings
The AAR consists of:
- one member from amongst the officers of Central Tax; and
- one member from amongst the officers of State Tax,
Rule 103 of CGST Rules provides that the member of the AAR shall not be below the rank of Joint Commissioner.
Similarly, the AAR consists of
- the Chief Commissioner of Central Tax as designated by the CBIC; and
- the Commissioner of State Tax
Section 103(1) of the CGST Act provides that the advance ruling pronounced by AAR or AAAR is binding only on:
- the applicant who had sought such ruling; and
- the concerned officer or the jurisdictional officer in respect of such applicant
It can be seen that the AAR & AAAR are comprised solely of officers from the State & Central GST Department and their rulings are binding only on the applicant of such rulings & their jurisdictional officers. These rulings, which are not even binding on any other assessee in the same state, can by no stretch of imagination be applied on assesses on PAN India basis.
In other words, in absence of any judicial member in the AAR & AAAR, an advance ruling is merely the view of the officers of the GST Department in respect of a particular aspect of a proposed or ongoing transaction.
Notwithstanding the merits or demerits of such rulings, they can influence the view of Revenue Officer in respect of a specific transaction.
With the AAR & AAAR constituted under the respective State GST laws, there is always a possibility of divergent rulings being given on the same question by different authorities. In the past, such divergent rulings have only added to confusion and chaos in the minds of the assessees.
The need to have conformity and uniformity of advance rulings was also highlighted by the Hon'ble Union Finance Minister during the discussion in the 11th GST Council Meeting, and according to him, in case of any conflict in advance rulings, the courts could resolve it.
Are Advance Rulings influencing policy decisions?
While advance rulings are not binding on any person other than the applicant and its jurisdictional officer, the chaos/ confusion created by some of the advance rulings have forced the CBIC to issue clarificatory circulars in the past.
Recently, the CBIC vide Circular No: 140/10/2020 – GST dated 10.06.2020 clarified that no GST is payable under reverse charge on remuneration paid to directors where the said directors are employees of the Company i.e. the said remuneration is recorded as salary to the such directors in the books of accounts of the Company and TDS is deducted u/s 192 of the Income Tax Act. This was necessitated due to conflicting advance rulings on the same issue by AAR Rajasthan & AAR Karnataka in M/S. CLAY CRAFT INDIA PVT. LTD. (RAJ/AAR/2019-20/33 dated 20th February, 2020)&M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD. (KAR ADRG 83/2019 dated 25th September, 2019) which held that GST is leviable under RCM on salaries paid to directorson one hand and ruling by AAR Karnataka in M/s Anil Kumar Agrawal (KAR ADRG 30/2020 dated 4th May 2020) which held that no GST is payable under RCM on salaries paid to executive directors.
However, not all efforts to clarify such controversial issues have seen the light of the day. One of the most discussed advance ruling, given by AAR Karnataka & upheld by AAAR Karnataka in case of M/s. Columbia Asia Hospitals Pvt. Ltd (KAR/AAAR/Appeal-05/2018) held that activities carried out by an employee of one office of a Company for another office located in another state would be a taxable supply. At the time of the 35th GST Council Meeting, the Law Committee had placed before the Council a draft circular providing clarification on the taxability of activitiesperformed by an office of an organization in one State to the office of that organization in another State. However, owing to lack of agreement on the draft circular during the Officer's Meeting, and suggestion by State of Karnataka to not issue any circular where the AAR had given a ruling, the issue was deferred for further examination by the Law Committee. Relevant extract of the minutes of the 35th GST Council Meeting is reproduced as under:
Agenda Item 6(iv): Clarification regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons
- The Principal Commissioner (GST Policy Wing), CBIC, stated that during the Officers meeting held on 20th June, 2019, there was no agreement on this Agenda item. The State of Punjab had expressed apprehension that by issuance of this circular, almost 90% taxpayers might become non-compliant for their past practice as the CGST Act did not make Input Service Distributor (ISD) provision compulsory. He also expressed that revenue implication was not much as input tax credit would be availed except where the taxpayers were dealing in exempted goods, such as Food Corporation of India. He further informed that the State of Karnataka had suggested not to issue any circular where the Authority for Advance Ruling had given a ruling. He stated that in this view, during the officers meeting on 20th June 2019, it was recommended to defer this agenda item for further examination by the Law Committee. The Secretary suggested that the Council could agree to this suggestion. The Council agreed to the same.
- For Agenda item 6(iv), the Council approved to defer its consideration and the Law Committee to examine it further.
Similarly, during the 39th GST Council Meeting, another draft circular was placed before the Council, seeking to clarify that 'Economic surplus' retained by the Brand Owners in a Contract Bottling Arrangement in AlcoBev Industry, being in the nature of profit of the Brand Owner, is not taxableunder GST.On the said issue, the position was well settled in the pre-GST regime that no service tax was payable on such economic surplus, however divergent rulings were given by Karnataka & Maharashtra AAR under the GST regime.
The proposed circular was deferred by the GST Council for its considerationas some states were of the view that the proposed clarification seemed to negate the advance rulings given. Further, these states were of the opinion that jurisprudence should be allowed to evolve in case of differing advance rulings.
These instances clearly highlight that despite the pressing need to clarify the position under GST on certain contentious issues and with the Law Committee of the GST Council having formed a definite view, no final decision has been taken due to resistance being shown by various states as such clarifications may negate the advance rulings given in their states.
Conclusion & Way Forward
While the objective behind introducing the advance ruling mechanism was to limit unwanted litigation under GST, the same is yet to be achieved. The rulings given by various AARs which are widely discussed have only contributed confusion in the industry and amongst the public at large. The GST Council also seems to favor the wait and watch approach, which would only lead to never ending litigation.
It would not be correct to say that the decisions of AAR & AAAR are to be completely disregarded. Notwithstanding that these advance rulings are not binding on assesses other than the applicant, it is clear that such rulings influence decision making by the Department as well as the GST Council. However, these rulings should not be followed blindly.
These rulings require a careful analysis. Where it appears that a particular advance ruling is averse to any existing tax position taken by an assessee, such tax position should be revalidated basis the applicable law in force.
For transactions proposed to be undertaken, these rulings may be referred to design a tax efficient strategy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.