India’s Advance Tax Rulings Benefit Non-Resident Investors

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Apr. 28 – Differences of opinions between the tax payers and the tax administration are a universal phenomenon. Advance tax is a mechanism by which such problems would be settled in advance and tax payers are aware of their liability. Therefore, the Indian government has set up an authority to provide advance tax ruling.

The rewards of a ruling to taxpayers are that it offers assurance regarding the tax consequences of a particular business deal. Certainty and predictability are particularly important in the context of pre-transaction tilling. A post operation ruling would at least serve to accelerate the assessment process thereby dipping drastically cost of litigation, so that the taxpayers may better plan for future undertakings.

A ruling method also gives the taxpayers the chance to revise a proposed transaction where an unfavorable ruling is issued. A ruling procedure offers a number of rewards to tax authorities, principally, in those countries which have a self assessment system as it promotes greater taxpayer assurance in the management of the tax system. A ruling process also offers tax authorities the opportunity to purview the types of transactions that taxpayers are presently considering and paves the way for authorities to develop administrative practices where none currently exists to prepare them to undertake the complicated tax matters in a more professional manner. Rulings should also result in a reduction in compliance work load to tax authorities.

In many countries, the idea of an advance ruling has been identified for the existing tax payers. Whereas in India this concept has been initiated for the first time in June, 1993 to offer a forum to non-residents for his dealings or proposed transactions. Therefore even a non-existing tax payer (i.e. non-resident) may seek a ruling on the transactions which have not yet undertaken in India. Only in October, 1998 specific categories of residents have been allowed to apply for seeking an advance ruling. As a result the concept of advance ruling as established in developed and developing countries stand on a different footing, as compared to that customary in India. The scheme of advance ruling in India has been composed after an in-depth study of the concept, merits and demerits of the system of advance ruling prevailing in various countries.

Who are eligible to apply advance ruling?
A non-resident establishing a joint venture in India in collaboration with a non-resident or a resident; or a resident establishing a joint venture in India in collaboration with a non resident; or a wholly owned Indian subsidiary of a foreign holding company.

How do advance tax rulings help foreign investment?
To assist foreign investment into the country a number of steps have been taken by the Government of India. Setting up an Authority for Advance Rulings, Customs & Central Excise to give binding rulings, in advance, on Customs, Central Excise and Service Tax matters pertaining to an investment venture in India is one such measure. The legal provisions of advance rulings were initiated through the Finance Acts of 1998, 1999 and 2003. The scheme of advance rulings has believed special significance in the perspective of greater emphasis on FDI. Advance rulings give far superior assurance to foreign investors in reverence of their prospective indirect tax liabilities.

The method of advance rulings permits a non-resident investor setting up a joint venture in India in partnership with a non-resident or a resident, or a resident setting up a joint venture in India in partnership with a non-resident, who offers to undertake any “business activity” in India to seek, in advance, a ruling from the Authority for Advance Rulings. A wholly owned subsidiary Indian company, of which the holding company is a foreign company, can also ask for such rulings.

Benefits of seeking an advance ruling:

  • It guarantees a prospective non-resident investor entering into a joint venture with a non-resident or a resident, or a wholly owned Indian subsidiary of a foreign holding company, of their Customs, Central Excise or Service tax liabilities well in advance. This helps them to verify the viability of their proposed project
  • An advance ruling is of a compulsory nature
  • It can be acquired within 90 days of filing the application and the process is clear and economical
  • It helps to evade long drawn-out and costly tax litigation

The issues on which advance rulings can be sought
An advance ruling can be required on any question of law or of fact in relation to an ‘activity’ proposed to be undertaken. The questions on which a ruling can be sought are:

  • Categorization of goods
  • Principles of valuation
  • Applicability of exemption notifications allowing concessional or nil duty
  • Applicability of all notifications under the Customs, Central Excise and Service tax having a bearing on the rate of duty
  • Credit of input duty (CENVAT credit)
  • Credit of service tax

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