What is advance tax ruling and why CBDT wants to amend these rules

After rationalizing forms for income tax returns (ITR) filing, the Central Board of Direct Taxes (CBDT)  now plans to bring transparency in tax rulings for individuals, which is why the regulator has invited stakeholders and general public comments on draft notification proposing amendment to Rule 44E and forms like Form 34C and Form 34D - these are forms filed for Advance Rulings. 

In a notification, CBDT stated that, under Base Erosion and Profit Shifting (BEPS) Action 5, exchange of rulings on Permanent Establishment (PE) by Authority for Advance Rulings is required to be done not only with the countries of residence of all related parties with whom taxpayer enters into transaction, but also with the country of residence of the immediate parent company and the ultimate parent company.

Therefore in order to implement the recommendations made under Action 5 of BEPS Action Plan to bring greater transparency in cross national transactions, Forms 34C and 34D (Forms for Advance Rulings) are required to be modified so that details such as name, address and country of the residence of non-resident’s immediate parent company or ultimate parent company etc. are captured at application stage itself.

As per Income Tax rules, rule 44E generally deals with application for obtaining an advance ruling. 

An advance tax ruling is usually issued by tax authorities in this case I-T department, to individuals and corporates who request clarifications about certain tax matters. It is mostly requested when a taxpayer is confused and uncertain about a particular provision. 

The I-T department defines advance ruling as a written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. It has been defined in section 245N(a) of the Income-tax Act, 1961 as amended from time-to-time.

Under section 245N an advance ruling can be obtained by the following persons:-

• a non-resident
• a resident-undertaking proposing to undertake a transaction with a non-resident can obtain advance ruling in respect of any question of law or fact in relation to the tax liability of the non-resident arising out of such transaction
• a resident who has undertaken or propose to undertake one or more transactions of value of Rs.100 crore or more in total [vide Notification No. 73, dated 28-11-2014]
• a notified public sector company
• any person, being a resident or non-resident, can obtain an advance ruling to decide whether an arrangement proposed to be undertaken by him is an impermissible avoidance arrangements and may be subjected to General Anti Avoidance Rules or not
• an applicant as defined in section 28E(c) of the Customs Act, 1962
• an applicant as defined in section 23A(c) of the Central Excise Act, 1944
• an applicant as defined in section 96A(b) of the Finance Act, 1994

 An applicant desirous of obtaining an advance ruling should apply to the Authority in the prescribed form stating the question on which the ruling is sought.

The application has to be made in quadruplicate in Form Nos:—

34C - applicable to a non-resident applicant

34D - applicable to a resident having transactions with a non-resident

34DA - applicable to a resident seeking advance ruling in relation to his tax liability arising out of one or more transactions valuing Rs100 crore or more in total which has been undertaken or proposed to be undertaken by him

34E - Applicable to Public Sector Company as notified by government via Notification No.11456, dated 3/8/2000

34EA - for determining whether an arrangement is an impermissible avoidance arrangement as referred to in Chapter X-A or not

Further, vide Finance Act, 2017, the definition of the term “applicant” for the purpose of Advance Rulings has been amended by substituting clause (b) of section 245N of the Income-tax Act, 1961 (the Act). Therefore, consequential amendments are required in Rule 44E and respective Forms to bring them in harmony with the amendment to the Act.

Thus a stakeholder or general public can file in their comment in regards to amendment brought under advance tax ruling by April 30, 2018 at  www.incometaxindia.gov.in. The comments and suggestions may be sent electronically by April 25, 2018 at the email address, [email protected]. 

The scheme of advance rulings was introduced by the Finance Act, 1993. 

Since the start of fiscal year FY19, the department has been making many changes to income tax rules in India. Recently the CBDT also notified  new ITR Forms for the Assessment Year 2018-19.