Advance Ruling – NRI or Resident Indian can Avoid Tax Issues

Advance Ruling is one of the “Brahamastra” to avoid any future taxation issues. Not many NRI’s or Resident Indian’s are aware of the same. Advance Ruling is more popular among the corporates, in the case of disputes between 2 parties or high-value transactions. Alternatively, it can help to plan income tax liability in advance and avoid any future shocks on tax liability.

In layman terms, if a resident Indian has any doubt or issue related to taxation in respect of a transaction with NRI that is already undertaken or proposed i.e. Scenario A.  Alternatively, if the transaction is proposed or undertaken in India by an NRI i.e. Scenario B. In either of the scenarios A or B, you may apply for Advance Ruling. It helps to determine the tax liability arising out of the transaction. In my opinion, it is more useful if NRI or Resident Indian apply before the transaction is undertaken.

To clarify that Advance Ruling can be obtained only in the case transaction is undertaken or proposed in India. An NRI or Resident Indian cannot obtain Advance Ruling on a tax implication in India for a transaction executed abroad. In other words, Advance Ruling is to seek clarification from Income Tax Department on the tax implication of a transaction which has been proposed/undertaken in India.

You can apply to Authority for Advance Ruling (AAR) u/s 245N to 245V of Income Tax Act. The fees vary from Rs 10,000 to Rs 10L depending on the category of case. The fee in property matters is Rs 10,000. In my opinion, it is worth in most of the cases as it avoids all the future tax hassles.

Though Advance Ruling is a very vast topic and applicable for wide range of transaction by/with NRI’s. Moreover, it is very complex subject. The applicability, interpretation, and conclusion may vary from case to case basis. My sole objective of posting this blog is to inform/educate the NRI Sellers/Resident Indian buying property from NRI about Advance Ruling. It may not be applicable/beneficial in all the cases.

Advance Ruling, TDS on NRI Property and Capital Gain Tax

Trust me there is a lot of confusion in case of TDS/Tax Liability on NRI Property. I tried to cover this topic in my post, NRI’s and TDS on Sale of Property. Besides TDS, Capital Gain again is a vast subject. Through my posts, i tried to cover the common issues and their possible solutions. All the cases are not so simple and there is confusion or doubt on tax liability in India. An NRI Seller and Resident Indian Buyer present their own version of TDS, capital gain, DTAA, and tax liability. The end result, the deal is called off in most of the cases. The cases related to inheritance, agricultural land, both parties are NRI etc may fall in this category.

The NIL Tax deduction or lower tax exemption certificate should not be confused with Advance Ruling. The tax deduction certificate only pertains to the TDS on the transaction. On the other hand, Advance ruling is related to the tax liability.  In other words, TDS is Step 1 and fulfillment of Tax Liability is Step 2. In this case, step 1 ensures the compliance of step 2.

Normally the cases presented to AAR are related to computation of income/capital gain or tax liability. In technical term, it includes the determination of any question of law or of fact specified in the application. Therefore before you apply for an advance ruling, you should check with your CA whether your application is valid or not.

Exclusions – Application for Advance Ruling

1. In some cases, the fair market value of the property has a major bearing on taxation or tax liability.  Normally for taxation purpose, the circle rate is considered as the fair market value of the property. But what if the Circle Rate is more than the Market Value?  What should be the fair market value of the property? Be it NRI or Resident Indian Buyer/Seller, both parties will have huge tax implication in such cases.

For example, the difference amount between circle rate and market value will be taxed as income from other sources to the buyer. On the other hand, the seller has to consider the circle rate for computation of capital gain. With the depressed real estate market, such cases are on the rise. The end result, to avoid any future tax liability the buyer/seller approach income tax department for an advance ruling. Unfortunately, Advance Ruling does not cover the determination of the fair market value of the property.

2. There is a great rush to obtain an advance ruling in case a taxpayer receive income tax notice. Alternatively, the matter is pending in court or with the appellate tribunal. Unfortunately, Application for Advance Ruling is not allowed in such cases if the decision is already pending with tax authorities/court. As the name suggests ruling is passed in advance on any taxation issue.

3. If you hire a smart tax consultant then he may design/execute your transaction in such a way to avoid income tax. Please remember that income tax department is “smarter” than “smart” tax consultant. The tax consultant will suggest you to get his suggestions vetted from AAR. Reason being, Advance Ruling by authority is binding on both the parties. We will discuss it later. Authority for Advance Ruling will not allow application in cases where in objective is to avoid income tax.

How NRI’s can Apply for Advance Ruling?

Normally NRI’s find it difficult to apply. The CA’s suggest them to sign the application and send it back to them in India. To be honest, this is not the right way. Any document signed abroad is legally not valid in India. Therefore, NRI’s can authorize someone in India to sign the application their behalf through Power of Attorney. The Power of Attorney by NRI can be executed in a similar manner as i shared in my post, Imp Points on Power of Attorney by NRI. It can be attached with the application.

Also, please note that that post submission, the application can be withdrawn only within 30 days from the date of application.

Advance Ruling is Binding

The AAR has powers of a civil court. Therefore, as i mentioned that advance ruling is binding on both the parties i.e. applicant and the tax authorities. If the application is made after the transaction is undertaken then IT authorities cannot decide any issues related to the transaction till Advance Ruling is passed. A point to note is that Advance Ruling is binding only on the rank of Principal Commissioner and his subordinates. In future, a case can be opened by the IT officer of a rank higher than principal commissioner against the advance ruling. Though it is highly unlikely :).

The advance ruling can be declared null and void if in future IT department finds out that the facts presented by the applicant were wrong/misrepresentation or fraud. In the case of a change in law, the ruling stands void.

Summary: In this post, i have not discussed the operational perspective as you may find hundred of posts on same. I tried to cover all the critical aspects of the advance ruling in a summarized format. It is advisable to hire a qualified CA who can help you in this process. It is important to gain working knowledge of the subject that i already covered in this post so that you can understand the implications of the advance ruling.

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