Fixing AAR

The advance ruling mechanism under GST is fraught with many gaps, which is compounding the problems of taxpayers

- DIPAK MONDAL

In June, the Karnataka Authority for Advance Rulings (AAR) for Goods and Services Tax (GST) ruled that Malabar Parota is not the same as ready-to-eat chappati/roti as it has be processed further for consumption, and hence should be taxed at 18 per cent and not 5 per cent (tax rate for chappati). There was outrage and, soon, memes around the ruling started doing rounds of social media.

Blame it on flaws in the way AARs are constituted or complexity of India’s tax laws, the Karnataka AAR is not the only one that has been in news of late for wrong reasons.

Take the issue of tax on compensation paid to directors of an incorporated entity. Two state AARs — Karnataka and Rajasthan — came up with different interpretations and rulings on the issue earlier this year. The Rajasthan AAR said directors are not employees and so their fee should attract GST under the reverse charge mechanism (the company will pay the tax on behalf of directors). The Karnataka AAR, however, noted that an ‘executive’ director sells services as an employee, and therefore, his or her remuneration will not attract GST. However, it also said that remuneration to a non-executive director will attract GST. What is more perplexing is that the Karnataka AAR had, last year, given an opposite ruling on this issue. All this is adding to the confusion of taxpayers.

AARs have been set up to help taxpayers seek clarity, in advance, on tax to be paid on certain transactions, and in doing so avoid long-drawn tax litigation that is so common in India.

However, the fact that every state/Union territory has one AAR, manned by ‘junior’ tax officials, means that the rulings at times lack maturity, consistency and are often pro-revenue, say tax experts.