New Delhi: The government is considering the establishment of an advance ruling mechanism to help Indian companies resolve issues relating to tax deducted at source (TDS). It is being conceptualized along the lines of the Authority for Advance Rulings (AAR) for non-resident entities, said two officials from the Central Board of Direct Taxes (CBDT), both of whom spoke on condition of anonymity.
Indian companies sometimes incur huge non-compliance costs because of different interpretations of various provisions under the Income-tax (I-T) Act and are left with no option but to take legal recourse. An advance ruling option gives these companies the option of getting binding decisions beforehand and saving time and money.
“While non-residents and public sector undertakings can get an advance ruling from AAR for assessing their income-tax liability, there is no such mechanism for other Indian companies,” said one of the officials cited above. “For solving disputes, while companies have the option of legal recourse like approaching the CIT (Appeals), it is a long-drawn process. In cases where companies want to quickly find a solution, the advance ruling will be a big help.” CIT is commissioner of income tax.
TDS—tax collected at source by the government on accrual of income—was conceptualized to minimize tax evasion, widen the tax base and ensure a regular flow of taxes to the government.
The government collected around Rs 1.66 trillion through TDS in the 2010-11 fiscal, around 37% of total direct tax collections. As TDS is paid in advance, the government has been focusing on increasing its share of total tax collections.
“There has been a demand from companies for an advance ruling system. We are considering the options. But, as of now, we have not taken a decision,” said the second CBDT official. “It can be a double-edged sword. If there is an advance ruling, it’s a binding decision and the scope of debate is minimized.”
The I-T department conducts surveys to verify books of accounts, stock, cash and documents at the business premises of the taxpayer to find out if the companies are violating tax laws. In case of non-payment or under-payment of taxes, these companies could face penalties from the department.
Mint had reported on 21 July that at least six large advertising firms had come under the scanner of the I-T department for alleged non-payment or under-payment of TDS to the tune of Rs.200 crore. Some of the telecom firms have also been surveyed by the I-T department for alleged non-deduction of TDS while selling their prepaid products through distributors, Mint reported on 9 August.
Currently, in cases of dispute, the company can approach CIT (Appeals). Both the parties can subsequently appeal against the judgement at the I-T tribunal, the high court and the Supreme Court.
“At present, only non-residents can reveal their proposed business transaction and get some certainty upfront regarding their tax liability by approaching the AAR. The advantage of an advance ruling should not be restricted only to them,” said Sudhir Kapadia, tax markets leader at audit and consulting firm Ernst and Young Pvt. Ltd.
“Even Indian companies face a lot of uncertainty due to varied interpretations of many sections of the Income-tax Act,” he added.