This is the fourth post in the our new blog series on the Budget 2018. Following our earlier posts (here, here, here and here) on the impact of the Budget on the Direct, Indirect Tax regimes and the Healthcare sector, this piece focuses on the amendments to the advance ruling system under the Customs Act. We hope you enjoy reading this as much as we have enjoyed putting this together.
The Finance Act, 2017 consolidated the Authority for Advance Rulings (AAR) for customs law and direct taxes, to promote the ease of doing business in India. In continuation to that, as well as the introduction of the Goods and Service Tax (GST), the Union Budget 2018 (Budget) proposes various amendments to the Customs Act, 1962 (Customs Act). Such amendments not only include enhancement in the scope of the advance ruling system in India, but also entail revamping of its procedural aspects.
Scope of AAR
The regulatory environment is proposed to be made more conducive by enlarging the ambit of the eligible persons entitled to make an application for advance ruling. Presently, only a joint venture in India, a non-resident person setting up a joint venture in collaboration with a non-resident/ resident, a wholly owned subsidiary of a foreign company, or certain other notified persons (i.e. PSU’s, resident companies and firms, residents importing from Singapore) can apply for an advance ruling.
The amendments proposed in the Budget would allow any person holding a valid Importer-Exporter Code, exporting any goods to India, or having a justifiable cause to the satisfaction of the AAR, to make an application for advance ruling. The said proposal grants wide discretionary powers to the proposed AAR to be constituted under the Customs Act (Customs AAR) to entertain any applicant having a justifiable cause to its satisfaction. This potentially extends the said facility to all persons, including foreign individuals, looking to independently set up business in India or export to India. Additionally, in line with the intent of ensuring the ease of doing of business in India, the proposals include amendments to allow foreign persons intending to export goods to India to be represented by an authorised Indian resident for advance ruling purposes. Interestingly, it is also proposed that the ambit of Customs law be expanded to include persons out of India. This would facilitate the effective regulation of import-export transactions undertaken by foreign suppliers.
The second important development in the context of advance rulings is that the Budget proposes to empower the Central Government to notify additional matters on which an application for advance rulings can be made by businesses. In other words, importers and exporters would be able to seek advance rulings on matters beyond the classification of goods, applicability of notifications having bearing on duty, valuation, etc. Such matters could be in the nature of “admissibility of input tax credit of tax paid” or “determination of tax liability”. The said proposal is in the nature of an enabling provision allowing Central Government to mould and orient the advance ruling system in line with the evolving requirements of international investors. It not only reflects progressiveness and foresightedness, but also reinforces Central Government’s commitment towards giving the “Ease of doing business in India” initiative, a lasting effect.
The Budget also proposes the introduction of an internal appellate hierarchy for AARs. This change is to harmonise the indirect taxation system in India, as GST legislation also provides for an appellate authority for the AAR system. The AAR constituted under the Income Tax Act, 1961 (IT Act), which, pursuant to the Finance Act, 2017, acted as the AAR under Customs legislations, is now proposed to be appointed as the appellate authority for advance rulings under the Customs Act.
The idea of consolidating AARs gave rise to a dilemma as to the ability of such a body to dispose-off the growing quantum of pending applications extant before the individual benches constituted for indirect taxes and direct taxes. To address such concerns and to ensure an expedited disposal of new applications, proposals have been included to allow the Customs AAR a time limit of three months from the date of the application. In the event of an unfavourable advance ruling from the Customs AAR, applicants would have a recourse of appeal, acting as a fresh opportunity for importers or exporters to reconsider their position. Such an appeal would have to be filed within 60 days from the date of communication of the order of the Customs AAR. The appellate authority would also have to dispose-off such appeals within a period of three months from the date of their filing. Accordingly, AAR constituted under the IT Act (i.e. appellate authority for the Customs AAR) shall receive limited customs applications, ensuring lesser burden and expeditious outcome.
However, it is pertinent to note that the proposed appellate authority cannot admit appeals against advance rulings passed by it, while it has acted as an AAR for the purpose of Customs legislations. Accordingly, the applicants seeking to challenge any such rulings passed by the AAR constituted under the IT Act, during the interim period, shall have to approach the jurisdictional High Courts for a writ-based remedy. As a result, the proposed facility of appeal to the appellate authority, shall not be available to such applicants.
Consequently, corresponding amendments, in relation to the appointment of the chairperson and members of the appellate authority and the Customs AAR, have been proposed to the IT Act and the Customs Act. This provides more clarity over the expertise of members who are to be appointed to the Customs AAR to decide on matters pertaining to indirect taxes. However, ambiguity in relation to the expertise of members of the appellate forum remains an open question. Additionally, separate applications may entail separate approaches by distinct benches of the AAR and additional time and cost on the account of the applicants. This may also lead to commercially incompatible viewpoints between the indirect and direct tax rulings.
The government appears to be committed to its intent to create a conducive environment for businesses in India. However, the success of such initiatives is heavily dependent on the effective implementation of the proposed amendments and clarity on the ambiguities that still persist on various fronts, in relation to advance ruling systems.
* The author was assisted by Shiladitya Dash, Associate.