JUNE 05, 2018

By Mr SC Jain, Managing Partner, RSA Legal Solutions

ON high seas /in customs bonded warehouses/by duty free shops/by SEZ units:

1. The Goods and Services Tax (GST) law came into force with effect from 01-07-2017. Like any other new legislation, it had its own share of teething issues. These issues were more prominent with regard to applicability / levy of GST on supplies made beyond the customs territory i.e.,

a. goods purchased from a foreign country by an Indian Entity and directly sold to another foreign country, without physical importation into India (mercantile trade);

b. goods supplied on high sea sales basis;

c. goods supplied from a customs bonded warehouse;

d. goods supplied by duty-free shops located at the airport in the arrival and departure hall;

e. goods supplied by an SEZ unit in the DTA.

2. It was totally unclear to the trade and industry, to consultants/advocates practising in this field and even to the law makers as to the correct legal position with regard to applicability of GST in the above enumerated situations. Towards this, on applications being made to the Advance Ruling Authority certain clarifications were made available. Clarifications in respect of some of the above situations were also issued by the CBIC. This article attempts to discuss the GST implications on supplies beyond customs territory and analyse the various advance ruling and CBIC circulars issued in this regard.

Mercantile Trade

3. It was correctly clarified by the Kerala Advance Ruling authority vide its order CT/2275/18-C3 dated 26.03.2018 - 2018-TIOL-02-AAR-GST that in case of goods purchased by an Indian entity from abroad and sold directly to another country without bringing them in India, no GST will be payable.

High Sea Sale

4. It was clarified vide CBIC Circular No. 33/2017-Cus dated 01.08.2017 that goods imported by an Indian entity and sold on high seas sales basis will also not attract GST on its sale by the original importer to the high seas sales buyer. It was clarified that IGST will be payable only once, when the high sea buyer files bill of entry for home consumption with the customs authorities, as a part of customs duty.

Sale for customs bonded warehouse

5. Thus, these doubts pertaining to the supply taking place beyond customs territory in case of mercantile trade and high sea sales were clarified as not being subject to payment of applicable GST. However, in respect of the goods imported and deposited in a customs bonded warehouse by one person and sold from the said warehouse to another person, utter confusion prevailed. Initially, it was clarified vide CBIC Circular No. 46/2017-Cus dated 24.11.2017 that such goods when sold from a customs bonded warehouse would attract applicable GST, on the ground that these goods are supplied in India.

6. In my humbly understanding that the position in the above circular was totally incorrect and illegal,because in such a situation the person who eventually files the bill of entry for home consumption would have to pay the GST twice. Once at the time of purchasing the goods from the person who had deposited them in the warehouse and secondly at the time of clearance from the customs bonded warehouse by way of IGST under Section 3(7) of the Customs Tariff Act (as a part of customs duty). This sort of understanding issued by CBIC was in fact also contrary to the commitment in Kyoto Convention to which India is a signatory.

7. Eventually,better judgement prevailed. CBIC now has issued a revised Circular No. 3/1/2018-IGST dated 25.05.2018 whereby it has been clarified that the goods sold in customs bonded warehouse will be considered as sold prior to their clearance from the customs area/territory and will not attract GST. In other words, now after this clarification, the anomalous situation has been removed. IGST now will be payable only once by the person who files the Bill of Entry for home consumption,and the same would be paid as a part of customs duty under Section 3 (7) of the Customs Tariff Act. This understanding is perfectly correct and accordance with the spirit of customs law and the GST law.

Sale in duty free shops

8. Despite the above clear understanding of dealing with goods sold from a customs bonded warehouse and its tax treatment, there are still certain identical areas wherein there remains utter confusion. For the sake of clarity, the said confusion needs to be removed on urgent basis. Such is the case with sale of the goods at the airport by the duty-free shops. Recently,the Advance Ruling Authority at New Delhi vide its Advance Ruling No. 01/DAAR/2018 dated 27.03.2018 - 2018-TIOL-08-AAR-GST has held that the sale made by the duty-free shops would be considered as supply within India and would attract the applicable GST. This in my understanding is totally incorrect and illegal.

9. I would like to clarify that the duty-free shops which are located either in the departure hall or in the arrival hall of an international airport are licensed as private customs bonded warehouse' under Section 59 of Customs Act. Once the CBIC has taken a position and clarified that there would be no GST in respect of the goods sold from the warehouse prior to the customs clearance then the same would squarely apply to the goods sold by duty free shops.

10. It has to be borne in mind that in case a person buys certain goods from a duty free shop in the departure hall,which it is invariably located after the customs clearance location at the airport, the passenger invariably is duty bound to take the said goods outside India and therefore,in essence it becomes a transaction akin to goods deposited in customs bonded warehouse and thereafter exported outside India under Section 68 of the Customs Act without crossing the customs frontier of India. Likewise, in case the goods are purchased by a passenger in the arrival hall then such passenger becomes liable to pay the customs duties (including the IGST on such goods incase the value of the goods exceeds the duty-free allowance limit). In this situation, the clearance from the duty-free shops is as good as clearance from a private customs bonded warehouse into India and should therefore be deal on same platform under the GST laws.

11. In nutshell, in both the situations there is no logic or legal basis to say that goods are subject to GST. The advance ruling given by the Advance Ruling Authority is contrary to the legal positon and the above circular issued by the CBIC for sale from customs bonded warehouse. Therefore, in the interest of the trade and industry and passenger sit is of utmost importance that a suitable clarification is issued by the CBIC in this matter so that all the doubts are clarified.

Supplies by SEZ unit in the DTA

12. Another unique situation is with regard to the units located in an SEZ and selling their goods in the DTA. Since as per the GST law, all SEZ units are also registered under the GST law and are liable to discharge the GST like any other DTA units barring few minor deviations. Simultaneously, SEZ units are liable to discharge the customs duties liability on the goods sold in the DTA in accordance with the provisions of the SEZ Act, rules and the Customs law.

13. Technically speaking, as of now in case any goods are sold by an SEZ unit in the DTA then it becomes liable to pay GST twice. Once under the GST law in respect of the goods sold in DTA as per the GST provisions. Secondly, by way of part of customs duty under Section 30 of the SEZ Act, 2005. It may be noted that when a bill of entry is filed for clearance of goods from an SEZ in the DTA then the buyer is required to pay IGST as part of the customs duty under Section 3 (7) of the Customs Tariff Act. In other words, here also the same anomalous position is there which was applicable to the goods sold from customs bonded warehouse.

14. It is pertinent to note that Section 53 of the SEZ Act provides that an SEZ area would be considered as an area beyond the customs territory of India. This provision further provides that all the SEZ will be considered as a port defined under Section 7 of the Customs Act. Thus, all units in the SEZ can be considered at par with a customs bonded warehouse.

15. In view of the provisions contained in the SEZ Act, it needs to be clarified immediately that no GST is payable under the GST law in respect of the goods sold by an SEZ unit in DTA. It is the customs duty and IGST under Section 3 (7) of the Customs Tariff Act,which are required to be paid and no separate tax is payable under the GST law.

16. In the like manner, it may be concluded that the goods sold by one SEZ unit to another SEZ unit whether in the same SEZ or in another SEZ are not chargeable to GST because such sales have to be construed as made before clearance of the goods from the customs territory of India. The sooner these points are clarified in the spirit of the GST law, Customs Act/SEZ Act, the better it would be for the department, trade and industry and other stakeholders.

17. Let us hope that the above anomalies on the supply of goods by duty free shops and by SEZ units will be clarified by CBIC by taking the clue and correct legal position taken in recently issued CBIC Circular No 3/1/2018-IGST dated 25.05.2018 in respect of sale of goods while those are deposited in a customs warehouse.

(The views expressed are strictly personal.)