Advance Ruling – A Curse to the Tax Laws Jurisprudence

 

Introduction

The concept of Advance Ruling was introduced in Indian tax law with the noble intent of providing certainty and clarity to taxpayers. By allowing individuals and businesses to seek clarification on tax liabilities before undertaking transactions, Advance Rulings were expected to minimize litigation and foster a tax-compliant environment. However, in practice, the institution of Advance Ruling—especially under the Goods and Services Tax (GST) regime—has attracted criticism and legal controversy. Far from reducing disputes, the mechanism has arguably increased confusion by delivering contradictory, inconsistent, and non-binding rulings. This article critically evaluates the functioning of Advance Ruling Authorities and argues that, in its current form, the system undermines the very jurisprudence it was designed to support.

 

The Legal Framework of Advance Rulings

Under the GST regime, the statutory framework for Advance Ruling is provided under Chapter XVII (Sections 95 to 106) of the Central Goods and Services Tax (CGST) Act, 2017. It allows an applicant to seek a ruling from the Authority for Advance Ruling (AAR) on issues such as classification of goods or services, applicability of notifications, determination of time and value of supply, admissibility of input tax credit (ITC), and liability to pay tax.

 

Each state has its own AAR and Appellate Authority for Advance Ruling (AAAR), making the system decentralized. Unlike the Advance Ruling mechanism under income tax law, which is centralized and binding on both the applicant and the tax department, GST Advance Rulings have a limited scope and applicability. They are binding only on the applicant and the concerned officer—not on others facing similar issues, nor on authorities in other jurisdictions.

 

The Core Problem: Contradictory Rulings

 One of the most troubling aspects of the GST Advance Ruling system is the frequent issuance of contradictory decisions by different State AARs on identical or similar questions of law and facts. This anomaly arises largely due to the decentralized structure and the absence of a central coordinating body or appellate forum above the state-level AAARs. The basic problem with such contradictory judgements is that the taxpayer does not understand ‘its uselessness’, and get victimised at the hands of the judicially camouflaged bureaucratic interpretation. The GST authorities have also issued notices based on such illegal advance rulings, as if they are case laws.

 

Examples of Contradictory Rulings:

1. Taxability of Solar Power Equipment:

1. • The Maharashtra AAR ruled that solar equipment supplied along with installation services constituted a “composite supply” with installation as the principal supply, thus attracting 18% GST.

1. • The Karnataka AAR, in a similar case, held that the supply was a “works contract” and applicable at a lower rate of 5%.

 

2. GST on Secondment of Employees:

1. • The Tamil Nadu AAR held that deputation of employees from a foreign parent company to its Indian subsidiary constituted supply of manpower services and attracted GST.

1. • The Maharashtra AAR held that such secondment is in the nature of employer-employee relationship and does not attract GST under Schedule III.

 

3. Taxability of Meal Vouchers:

1. • The Karnataka AAR held that Sodexo meal vouchers were taxable as goods.

1. • The Maharashtra AAR opined that vouchers were actionable claims and hence not subject to GST.

 

These conflicting interpretations on the same legal issues have led to uncertainty and confusion among taxpayers, professional advisors, and tax officers alike. The inconsistent application of law undermines the credibility of tax jurisprudence and defeats the objective of uniformity enshrined in the concept of “One Nation, One Tax”.

 

Advance Rulings Are Not Case Laws

It is crucial to note that decisions issued by AARs and AAARs are not judicial precedents. They do not have binding force on other taxpayers or authorities outside the jurisdiction of the ruling. Unlike decisions of High Courts or the Supreme Court, AAR decisions are administrative in nature and lack persuasive value in broader legal interpretation.

While judgments from constitutional courts contribute to the development of legal jurisprudence through interpretation, balancing of rights, and consistency, AARs serve only to answer queries based on facts presented by the applicant. Therefore, their decisions do not constitute “case law” in the strict legal sense and must not be treated as binding guidance.

In fact, several High Courts have held that AARs are not judicial bodies and their rulings are not binding precedents. For instance, in JSW Energy Ltd. v. Union of India (2021), the Bombay High Court observed that Advance Rulings have limited applicability and cannot bind other similarly situated taxpayers.

 

Institutional Flaws and Lack of Judicial Rigor

Another major concern with the Advance Ruling mechanism is the lack of judicial experience and training among its members. The AAR is typically composed of one officer from the CGST department and one from the SGST department. Both are essentially revenue officers and may lack the impartiality and legal training required for nuanced interpretation of tax laws.

This composition often leads to revenue-centric decisions rather than balanced interpretations of law. In several rulings, AARs have focused more on tax collection than legal clarity, further eroding taxpayer confidence in the institution.

Moreover, there is no appellate forum beyond the AAAR under the GST law. In cases where even AAARs have delivered contradictory rulings, taxpayers are forced to approach High Courts under writ jurisdiction, thereby defeating the objective of dispute avoidance.

 

The Impact on Tax Jurisprudence

Far from enhancing the jurisprudence on tax law, the Advance Ruling mechanism has complicated it by:

• Creating parallel streams of contradictory interpretations.
• Providing no clear hierarchy of authority.
• Eroding the principle of certainty in tax administration.
• Encouraging forum shopping by applicants seeking favorable rulings.
• Generating unnecessary litigation when rulings are disregarded by other tax authorities.

This situation is particularly damaging in a complex and nascent regime like GST, where clarity, uniformity, and predictability are vital for compliance.

 

The Need for Reform

To restore the credibility and utility of Advance Rulings, comprehensive reforms are necessary. These include:

• Centralization of the System: A national-level Advance Ruling Authority should be established to ensure uniformity across states.

 

• Judicial Oversight: Members of AARs should include judicial officers or legal experts with experience in tax law.

 

• Precedential Value: A select set of rulings should be given binding precedential value, subject to review by a national appellate forum.

 

• Codification of Rulings: A centralized database of rulings with annotations should be maintained to help taxpayers navigate decisions more effectively.

 

• Clarity on Legal Status: The law must explicitly state that AARs are not binding precedents and cannot override decisions of constitutional courts.

 

Conclusion

In theory, Advance Rulings were meant to reduce litigation, ensure clarity, and build trust in the tax system. In practice, however, the system has fallen short of these ideals. Through contradictory, inconsistent, and sometimes poorly reasoned decisions, Advance Rulings have created more confusion than clarity. By lacking binding force and judicial discipline, they fail to contribute meaningfully to tax law jurisprudence and may even erode it. Unless reformed, the mechanism risks becoming a bureaucratic tool that serves neither the taxpayer nor the law. Thus, in its current avatar, the Advance Ruling system may be aptly described as a curse to the tax law jurisprudence rather than a cure.