APRIL 25, 2018

By Neeladri Chakrabarti, Corporate Lead, Indirect Tax, CMC Limited

INDIA has slowly become an emerging market for exports and a plethora of industries and institutions have set up shop in the country promoting the business and earning foreign exchange for the country. The Government, recognizing this trend, has from time to time introduced various schemes to incentivize export, purportedly to streamline the flow of foreign exchange, and to make the export industry competitive in the international market.

However, after the Goods and Services Act(s) have been introduced in 2017, a peculiar situation has developed in relation to exports. In the previous regime of taxation, Section 66B of the Finance Act (w.e.f. 1 July 2012), provided in the charging section that all services provided or sought to be provided in the taxable territory were liable to Service tax. Taxable territory was defined as the whole of India except the state of Jammu and Kashmir. The Place of Provision of Service Rules, 2012 (POPS) read with Section 66C of the aforesaid Finance Act determined the situs of service and where this place of provision was outside the taxable territory, no Service tax was payable under Section 66B, even if the service did not fulfil all the conditions relating to export of service. Similarly, in the case of Central Sales Tax and Value Added Tax, sale of goods that took place beyond the customs frontiers of India were not exigible to tax, as they were considered to be taking place outside the taxable territory.

Fast forward to the GST regime, where the place of supply (under Section 12 and 13 of the IGST Act) is ostensibly required only to determine location and identify the tax to be paid. Further, the IGST Act (Section 7) makes it clear that even when the supplier is in India, and the place of supply is outside India, the supply istreated as an inter-state supply. Thus, it follows that unlike the previous regime, where only situs determined taxability; in the GST regime, the Acts have extended to negate this concept possibly to extract maximum taxable revenue from supplies made by exporters.

This peculiarity is now manifest in prevailing transactions that were previously exempt in the erstwhile taxation regime. In the recent advance ruling in re: M/s Rod Retail Private Limited - 2018-TIOL-08-AAR-GST the Authority for Advance Ruling in New Delhi has taken a narrow view on what supplies constitute "export" and has given a somewhat contentious ruling. The AAR while determining whether supply from duty free shops were "zero rated" for the purpose of export has held that supply of goods to international passengers from the said 'Duty Free' shops, located in the security hold of the international airport, may be taking place beyond the customs frontiers of India, however, since the said shops were within the territory of India under the CGST Act, the said supply was not tantamount to export and hence were liable to GST.

The AAR held that the goods could qualify as export only after they crossed the territorial waters of India and the situs of being outside the Customs frontiers of India had no bearing on the transaction to determine export. Section 2(5) of the IGST Act 2017, which determines export of goods, clearly states that taking goods out of India to a place outside India fulfils the condition of export. "India" is defined under Section 2(56) of the CGST Act as the territory of India including its territorial waters, seabed, sub soil, EEZ, Continental Shelf and the air space above its territory and territorial waters.

It was not in dispute that the duty free shop was situated beyond the Customs Frontiers of India. However, the issue in the present case was whether the said duty free shop was outside the territory of India i.e. whether it was "beyond the territory, airspace or territorial waters of India". Since this condition was not fulfilled, the said supply was made exigible to GST at the hands of the supplier. The situs of the supplier, outside the customs frontier of India, was deemed to be immaterial and adistinction between the customs frontiers of India and territorial waters of India was bought into sharp focus in this constrictive interpretation of the law by the AAR.

In an emerging market, where Indian businesses need to be fiercely competitive to foreign markets, this ruling handicaps duty free shops as they are now brought at par with their peers inside the customs frontier. Since these shops have been consistent earners of foreign exchange for the country, it begs the question whether this handicap, which appears to be a result of judicious use of red tape and bureaucracy, was really warranted? Especially in light of the fact that now foreign exchange inflow will be impacted as customers may prefer to do their business inside the frontier due to negation of the competitive advantage.

(The views expressed are strictly personal.)