Experts unsure if new AAR for direct taxes will resolve disputes faster

The Authority for Advance Rulings (AAR) for direct taxes will be replaced by the Board for Advance Rulings from the next fiscal year.

The board will comprise two members, who are officers not below the rank of chief commissioner. These were the Budget proposals, aimed at ensuring faster disposal of cases. The proposals also talked about limiting the interface between the board and the applicant in the course of the proceedings to the extent technologically feasible. 

They also called for optimising utilisation of resources through economies of scale and functional specialisation and introducing a system with a dynamic jurisdiction.

But the issue is whether the board would make the advance rulings in direct taxes relevant for companies or will it just be old wine in a new bottle. The government is convinced the board would now become relevant. Experts also believe that at least pendency of cases would come down, though only time will tell about quality of orders.

“Since there will be departmental officers in the board, we are at least sure of getting the manpower,” Central Board of Direct Taxes (CBDT) chairman PC Mody told Business Standard.

He said due to various reasons, AAR did not have the required manpower available to it, consequent to which a lot of applications were pending. Roughly, about 700 AAR applications are pending. The board will ensure faster disposal. Otherwise, the very purpose for which it has been formed will be defeated, Mody added.

Akhilesh Ranjan, former member, CBDT, said while there was the problem of vacancies on the AAR benches, replacing the authority with a board may not be the solution. “The problem was that retired judges were not coming and joining. However, changing the terms of service to make it more attractive could have been considered,” he said.

The other way could have been to open up the position to retired Income Tax Appellate Tribunal (ITAT) members or others, not necessarily judges, he said. Ranjan said the absence of an independent party in the board will not inspire confidence among taxpayers.

“While chief commissioners may be senior officers who know the law, they are ultimately revenue officers. So, the taxpayer is not going to feel that he’s going to get an objective opinion,” said Ranjan.

“Besides, under this proposal, appeals can be filed by either party, which will mean that most cases will land up in the high court,” added Ranjan, who headed the task force to overhaul the direct tax regime.

Amit Maheshwari, tax partner at AKM Global, a consultancy firm, said despite the board having the same quasi-judicial status as that of the AAR, the proposals would do little to assuage the concerns of taxpayers in terms of obtaining tax certainty.

“Members of the board would be officers not below the rank of chief commissioner. This implies that the advance rulings would, going forward, be pronounced by income tax authorities. We have seen in the past that this has not resulted in a favourable outcome for taxpayers,” he said.

Ashutosh Dikshit, partner at Deloitte India, who authored a report on AARs that was cited by the Supreme Court, said the proposal needs to be evaluated on different parameters. “If it is about liquidation of pendency, it would definitely help. Currently, the government is not able to appoint chairman and vice-chairman. AAR is not functioning. On that parameter, the proposal will help. Benches will start functioning,” said Dikshit.

On the quality of orders, he said one has to wait for the board to function.

“The difference is that when you have somebody from outside the income tax hierarchy, say retired judges, the signalling effect is definitely right. Traditional thinking is that if you have departmental officers, they would take the department’s view,” he said.

Earlier, the authority was different from the income tax department. All the members were either retired judges, or even if they were from the revenue department, they were retired or had to resign from their services, he said.

Now, the board has become an internal function of the department, Dikshit said, adding, “as of now, it seems the members would be serving officers. One has to see if they resign from their service after becoming board members.”

The Supreme Court, last year, recommended to the Centre to make the advance ruling system in direct taxes more effective and comprehensive.