The Hindu Business Line : Halting steps in advances

AT A recent workshop on Customs, Excise and Service Tax in Hyderabad, one of the hotly debated issues was the provision for advance ruling on Customs and Central Excise matters.

Section 28H of Customs Act, 1962 provides for filing of application for advance rulings. Such advance rulings can relate to classification, valuation, Rules of origin and rates of duty applicable for goods to be imported by the applicant. So far, only the following categories of persons could apply for such advance rulings:

i) a non-resident setting up a joint venture in India in collaboration with a non-resident or a resident;

ii) a resident setting up a joint venture in India in collaboration with a non-resident; or

iii) a wholly-owned subsidiary Indian company, of which the holding company is a foreign company,

This year, in terms of Finance Act, 2005, Section 28H has been amended to include the following categories of persons as eligible to apply for advance rulings: i) a joint venture in India; or ii) a resident falling within any such class or category of persons, as the Central Government may, by notification in the Official Gazette, specify in this behalf.

The provision as it exists today clearly shows that its purpose is to facilitate foreign investors. To take the benefit of an advance ruling, the applicant has to be a non-resident or a resident setting up a joint venture with a non-resident or a wholly-owned subsidiary company of a foreign company.

Thus for the lakhs of importers and assessees based in the country and who do not come within the above definition, the benefit of advance rulings cannot be taken. Why this discrimination against Indian industrialists and businessmen? This was precisely the question raised in the workshop. Only now, Section 28H has been

amended to enable the government to notify certain classes or categories of persons who also can apply.

However, so far, no such class of persons or categories of persons have been notified. Even if notification is to come out, one does not know how far the Government will expand the scope of "eligible persons".

It is true that any foreign investor would like to know the tax liability before he plans his activities in India. But it is equally important that the Indian importer also is enlightened about the tax liabilities before he plans his activities. Advance rulings, which are binding in nature on the authorities, can bring in several benefits.

Before any activity, including import, is undertaken, the importer has the advantage of knowing before hand, the tax liabilities on matters including those involving disputable aspects, so that he can take into account the tax structure and plan in advance suitably his activities such as procurement, manufacture and selling price of goods.

Unexpected demands for huge amounts being raised at a later date can be avoided. After a few years, if the importer is to receive surprise demands with penal and interest clauses that can only drain his resources and act as dampner in his pursuits.

Fighting the disputes with Customs authorities after importing the goods and while such goods are lying in the port/airport premises incurring demurrage charges can be eliminated. Accumulation of cargo with port authorities pending resolution of disputes is for nobody's benefit.

Generally, disputes relating to valuation arise at the time of assessment and clearance of the goods. Disputes relating to classification of the goods or rates of duties applicable arise at the time of clearance and also after clearance when audit scrutiny is carried out.

Advance rulings can eliminate arbitrary and subjective assessments by assessing authorities and consequently this will lead to removal of bottlenecks in clearance of goods as well as the scope for corrupt practices.

The Customs administration of Canada, which is one of the best in the world, has advance ruling programmes. The Canadian authorities provide nationally binding rulings with regard to a series of free trade agreements, which Canada has with other countries and all Canadian importers or their agents proposing to import goods in terms of those agreements are entitled to seek advance ruling.

It further provides that the Canada Border Services Agency will issue the rulings within 120 days of receiving complete information from the applicants. Countries such as the US and Australia provide advance rulings in terms of their trade agreements to any potential importer or exporter. In Finland any one wishing to find out the amount of excise duty payable can apply to the National Board of Customs for an advance ruling, which will be valid for one year. Such services are provided in these countries with the objective of enhancing the global competitiveness of those countries' businessmen on the international market and also to assist them in complying with trade law requirements.

Back home, even the VAT legislation of several States provide for advance rulings on VAT matters and there is no discrimination between an applicant who is a resident in one State and an outsider from another State.

It may be that, if advance rulings are to be made available to all Indian importers or assessees, the number of applicants may grow manifold. But that cannot be a reason for denying the benefit at the first instance. Such a situation will only show that we have complex tax laws. There can be a filter mechanism, such as prescribing a fee, to prevent frivolous applications. Whatever is said here regarding advance rulings for Customs duty liabilities will hold good equally to Central Excise duty liabilities, as these pieces of legislation contain similar provisions in this regard.

Therefore, if the Government provides advance rulings for Indian importers and manufacturers with appropriate procedure without a complicated definition of who can be an `applicant', then, that will go a long way in allowing Indian businessmen and assessees to concentrate on their business and manufacturing activities rather than get mired in litigation.

(The author is a Chennai-based advocate.)

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