AARs under GST hobbled by lack of judicial members, state bodies

With almost all orders by the authorities for advance ruling (AARs) under the goods and services tax (GST) going in favour of the Centre and states, the industry is banking on the appellate authority for a favourable ruling. But, the body is yet to be set up by many states.

Also, the lack of judicial members in AARs and appellate authorities has the experts worried. Earlier, under the central excise and service tax law, the AAR was headed by a judicial member who was a retired Supreme Court judge, as against central and state revenue officers now. 

Only 15 states have so far notified appellate authorities for challenging orders of AARs under GST.

“The whole edifice of advance ruling could be challenged as an independent dispute resolution mechanics when we see that members at the helm are tax officers who may not have independent views on the subject matter,” said Rajat Mohan, partner, AMRG and Associates.

“Earlier AAR was a high-level quasi-judicial body headed by retired judge of the Supreme Court of India which has now changed in the GST regime and we might have more revenue favouring decisions in future. This is the reason for fewer applications in the authority,” he added. 

The AARs provide for tax liability in advance, besides providing clarifications on tax provisions. 

“While appellate authorities have been notified in some states, if the decisions of the AAR duly consider business practices and market realities, then industry would not need to take recourse to appeals,” said M S Mani, partner, Deloitte India. 

In fact, petitions have been filed in various high courts over the lack of judicial members. Gujarat High Court accepted the petition and issued notices to the Centre, state and the GST Council over the absence of any judicial member in the AAR, despite the body acting in a judicial capacity with the rulings binding on the applicants.  

Besides, since AARs have state-specific domain, contrasting rulings have started prevailing in different states, creating ambiguity for the industry.

Recently, a ruling by Maharashtra AAR in case of a solar contract held that the contract would qualify as ‘works contract’ and charged a GST of 18 per cent even though it is a solar power generating system which is taxable at 5 per cent. Karnataka AAR, in the same case, has not recommended a GST rate and not ruled it as a ‘works contract’.

States, including Andhra Pradesh, Bihar, Gujarat, Rajasthan, Maharashtra, and Madhya Pradesh, have issued notifications for setting up of Appellate Authority for Advance Ruling.

The GST law provides for appeal process for AAR rulings through the appellate authority. An appeal needs to be filed with the appellate authority within 30 days of the AAR judgment and the order needs to come within 90 days.

“The flurry of GST advance ruling decisions seen recently indicates that some of the states have started passing orders. However, the process is yet to start in many states, leading to business houses operating only in some states as they are not able to determine their tax positions in advance in other states,” said Mani.

AARs in Kerala and Gujarat have ruled about GST in canteen services, though the issues were somewhat different from each other. Kerala AAR ruled that the GST will be levied on recovery of food expenses from employees for canteen services provided by the employer, increasing the compliance burden of taxpayers under the GST. The issue before Gujarat AAR was whether supply of canteen services by an outside caterer will be considered as outdoor catering and charged at 18 per cent or as canteen services at 5 per cent. The AAR ruled that it will be charged 18 per cent.

“The said ruling would open up a Pandora’s box for industries as well as employees, with increased cost of meals for employees or for businesses; where the cost of meals is borne by businesses and corresponding credit of such input GST being restricted,” said Abhishek Jain, tax partner, EY India, on the Gujarat ruling.

Harpreet Singh, partner, KPMG said the ruling is likely to result in higher meal costs in the hands of employees or for the business (if borne by business) considering that no credit for food and beverages is available.

Another AAR judgment ruled that outlets at the Delhi International Airport are not ‘free from duties’ under the new indirect tax regime, suggesting that GST will be charged for purchases made from the duty-free shops at the international airports. In the earlier indirect tax regime prior to July 1 GST roll-out, the duty-free shops were exempt from the levy of central sales tax and value-added tax as sale from such shops were considered as exports and supplies were deemed to be taking place beyond Customs frontiers.

A few key AAR judgments so far 

  • Gujarat: Supply of canteen services will be considered as outdoor catering and charged at 18% instead of as canteen services at 5%
  • Kerala: GST will be levied on recovery of food expenses from employees for canteen services provided by the employer 
  • Delhi: Duty-free shops at Delhi International airport not exempt from GST
  • West Bengal: Foreign universities services relating to enrolment of students from India taxable under GST 

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