India’s next investment reform should be tax certainty

Picture a foreign company deciding where to locate its next regional operation. India offers talent, scale and a growing market. However, before the company’s board approves the investment, it must assess the operating and tax costs.

If the tax treatment is highly uncertain, the company may assume the highest possible tax cost, scale down the operation, change its structure or choose another country. It cannot wait years for clarity. Clarity that arrives only during assessment or litigation cannot undo an investment structuring, or pricing decision already made.

This is why countries competing for capital cannot focus only on tax rates and incentives. Businesses also ask whether the tax system is predictable. A lower rate offers limited comfort if an investor cannot tell how the law will apply to its transaction.

Tax certainty thus shapes capital flows.

This matters especially now. Gross FDI inflows into India reached $94.5 billion in 2025-26. But after repatriation and disinvestment, net inward FDI stood at $40.9 billion. This was up from the $26-29 billion recorded over the previous two years but still below the $55-56 billion seen annually between 2019-20 and 2021-22. As India attracts more foreign capital, it must also create the certainty that encourages investors to remain, reinvest and expand.

An effective advance ruling mechanism is one way of providing that certainty. A party places the facts of a proposed transaction before a designated authority and receives a formal ruling on its tax treatment. Instead of waiting for the issue to emerge during assessment and move through appeals and courts, it receives an answer while the commercial decision still matters.

India recognised this need in 1993 when it created the Authority for Advance Rulings, or AAR, initially for transactions involving non-residents. The AAR was a quasi-judicial body. It was judicially chaired, its rulings bound the applicant and the tax department, and there was no routine statutory appeal.

For much of its early history, the AAR broadly kept pace with its workload. Pendency remained relatively contained, suggesting that the forum’s basic design was not inherently unworkable. A breakdown came later. In 2010-11, applications rose by about 143%, disposals fell by roughly 77% and pending cases increased nearly fivefold.

It remains unclear whether the deterioration and the rise in pendency that followed were ever fully diagnosed. The surge in applications may have reflected uncertainty over the Mauritius investment route ahead of the Supreme Court’s Vodafone decision. But was the existing bench capacity simply unable to absorb the higher caseload? The simultaneous fall in disposals raises separate questions. Were vacancies responsible? Were increasingly complex matters taking longer to decide? Were restrictive eligibility criteria making appointments difficult?

The public record does not provide a clear answer. This matters because different problems require different solutions. The failure was real, but its causes don’t seem to have been fully diagnosed.

In 2021, the government replaced the AAR with the Board for Advance Rulings, or BAR, citing prolonged judicial vacancies and pendency. Instead of a judicially chaired body, the BAR consists of two senior income tax officers.

A party approaches the BAR voluntarily and discloses the transaction before the ordinary assessment process begins. In return, the ruling must come from a forum that commands confidence and offers meaningful finality. By placing the BAR entirely within the tax department, the forum became easier to staff, however the redesign significantly weakened the perception of institutional independence.

The finality of the process also changed. BAR rulings can be appealed before the High Court by both the Revenue and the taxpayer. Appeals can correct errors, but a routine appeal route risks turning an advance ruling into the opening round of another tax dispute. Businesses seek advance rulings to avoid prolonged uncertainty, not to begin litigation sooner.

These concerns are reflected in the experience of applications transferred from the AAR to the BAR. In 2024, the government recorded that several applicants sought to withdraw applications originally filed before the AAR and later transferred to the BAR, citing the changed constitution of the forum, appealability, delay and other commercial considerations. These responses tell us that speed, credibility and finality must work together. A quick ruling from a forum that does not inspire confidence has limited value. A credible ruling delivered after the transaction is over has even less. A ruling that can routinely travel through years of litigation does not provide meaningful certainty.

There is also almost no public data with which to assess the BAR’s performance, including how many applications it receives and decides, how quickly it disposes these applications, how widely it is used and the outcomes of its rulings. This stands in stark contrast to the Advance Pricing Agreement mechanism, where such data is publicly made available, allowing for meaningful evaluation of its performance over time.

India should not have to choose between an independent institution that does not function and an operational one that does not inspire confidence. Several alternatives are available. The BAR could be strengthened by including legal, accounting or technical expertise. A two-track model could leave routine matters with the current administrative board while referring significant questions to an independent specialist bench. As an alternative a dedicated ITAT advance ruling bench could be used for issuing advance rulings or the earlier AAR structure could be restored, with a judicial chair and revenue and legal members, with a broader pool for the judicial chair, including retired ITAT Presidents.

Advance rulings should also bind the tax department so long as the facts and law remain unchanged, to avoid differing positions during assessment. Routine High Court appeals by both sides should also be avoided. One option is a limited taxpayer appeal directly to the Supreme Court, similar to the route from bodies such as the NCLAT and SAT. Alternatively, to avoid burdening the Supreme Court directly with complex and fact-intensive cases, a specialist appellate tier could be created within the advance ruling framework. Chaired by a retired Supreme Court judge, it could decide such matters before any further appeal to the Supreme Court. A third option is to restore the earlier AAR position, under which rulings were binding and could be challenged only through constitutional remedies. Any of these appellate options or restoring binding nature of rulings should be considered only after the advance rulings authority’s composition and institutional design have been suitably strengthened. Whichever model is adopted, it should allow errors to be corrected in a timely and expert manner without turning every ruling into ordinary tax litigation.

Alongside these, reforms aimed at strengthening taxpayer confidence should also be pursued. The CBDT should publish annual performance data, make anonymized rulings searchable, institute Chinese walls to prevent disclosures made during the ruling process from being used in regular assessment proceedings and use recurring questions to inform circulars or guidance. Once the system is functioning reliably, access can gradually be expanded to significant domestic transactions.

None of this requires a tax holiday, a lower tax rate or a sacrifice of legitimate revenue. It requires a credible institution capable of giving businesses a reliable answer before their decisions become irreversible.

In the competition for capital, certainty before the decision may matter far more than relief after it.

(Surya Prakash B.S. is Programme Director, DAKSH; Anuja Maniar Shah is Senior Research Associate, Tax Systems Reforms Initiative, DAKSH; Almitra Rego is Consultant, Tax Systems Reforms Initiative, DAKSH. Views are personal.)