JANUARY 08, 2019

By K Srinivasan, IRS

INTERNATIONAL passengers buying goods at airport 'duty-free' shops need to pay GST on their purchases or not, is still a mute question, even as the revenue department keeps a long silence over it.

The position of the revenue department has always been ostensibly that we cannot export our taxes. It was also learnt that the Revenue was committed to clarifying soon that duty free shops would not levy GST, but not just yet.

The correct procedure would appear to be -

1. That duty-free shops collect a copy of the passport from the passenger to whom it sells the goods;

2. And later on seek GST refund from the government of the taxes paid by them in procuring goods from manufacturers;

3. The copy of passport so produced should serve as proof of sale of the said goods.

They were exempt from central sales tax (CST) and value added tax (VAT) even in the erstwhile regime. Sale from such shops was considered as exports and supplies were believed to be taking place beyond the 'customs frontiers' of India.

In fact 'Duty-free' shops are said to enjoy a tax neutral status globally also as far as we know, as a matter of International understanding.

It all started with an order passed in March by the New Delhi bench of the Authority for Advance Ruling (AAR) in case of ROD Retail Private Ltd. - 2018-TIOL-08-AAR-GST, much against the age-old policy of not levying taxes on them by ordering that GST will be payable by duty-free shops in India. 

The reasoning of the AAR goes like this -

+ Since the 'duty free' shops are situated within the territory of India and was not taking goods out of India, hence their supply cannot be called 'export' under Section 2(5) of the IGST Act, 2017, or 'zero rated supply' under Section 2(23) and Section 16(1) of the IGST Act, 2017.

+ Under section 2(5) of the IGST Act, export of goods takes place only when goods are taken out to a place outside India. The country is defined under Section 2(27) of the Customs Act as "India includes the territorial waters of India".

+ Under Section 2(56) of the CGST Act, India means the territory of India, including its territorial waters and the air space above its territory and territorial waters.

+ Hence, the goods can be said to be exported only when they cross the territorial waters of India and the goods cannot be called to be exported merely on crossing the Customs Frontiers of India.

The AAR thus held -

++ That the supply of goods to international passengers going abroad from 'duty free' shops are happening within the territory of India under the Central GST Act and, therefore, squarely covered under the GST levy, without a doubt.

But is it really beyond all doubt is the question repeatedly being asked by all the stakeholders concerned.

In another matter of Vasu Clothing Pvt Ltd vs Union of India - 2018-TIOL-2931-HC-MP-GST before the Indore Bench of Madhya Pradesh High Court, the lawyer for the petitioner submitted that duty-free shops at international airports in India are located beyond the custom frontiers of the country and any transaction that takes place in a duty-free shop is said to be outside India and the petitioner is not liable to pay any CGST, SGST and IGST.

It was also submitted that some interim directions be issued to the Board to issue necessary clarification regarding eligibility of refund of accumulated credit on goods and services supplied by Indian suppliers.

A similar matter did arise during the pre-GST regime when the Supreme Court ruled in the case of Hotel Ashoka vs Assistant Commissioner of Commercial Taxes - 2012-TIOL-08-SC-VAT. The apex court had examined the issue of levy of VAT (Value-Added Tax) on the goods sold in duty-free shops.

It was observed that under the provisions of Article 286 of the Constitution of India and Section 5 of the CST Act, goods which were sold beyond Customs frontiers of India, the transactions had taken place in the course of import and the State Government was not permitted to levy VAT on such sale or purchase of goods. It was also observed by the court that the said sale transactions had taken place outside.

However, the AAR at Delhi, in its order on March 27 - 2018-TIOL-08-AAR-GST, mentioned that duty-free outlet is not located outside India, but within the territory of India as defined under Customs and CGST Act. It means supply here cannot be called export and accordingly GST will be levied.

Though the AAR decision is binding only on the applicant and the jurisdictional tax authority and also such a decision does not have a precedent value like that of a High Court or Supreme Court judgment, it can be used as persuasive tool in future cases. Keeping these in mind, a clarification is required to settle disputes in such matters.

Earlier this year, the AAR in Delhi had ruled that a retailer at the Delhi's I nternational airport would have to pay applicable GST on sales.

Despite supply of goods imported into India, till they cross the Customs frontiers of India, though treated as Inter State Supply in terms of the levying provision Section 7(2) of the IGST Act, Government has been persevering to bring forth circulars to clarify that levy will be attracted only coterminous with time of payment of Customs duties leviable under section 12 of the Customs Act, 1962

In the interregnum, value additions happening by way of high seas trade will cumulate and be charged to IGST as a countervailing measure in the hands of a person who de-bonds the goods from the Customs hold eventually as per the Valuation applicable as per sub-section (8) of Section 3 of the Customs Tariff Act 1975.

Also, the intervening transactions of Maritime Trade has also been taken care to be neatly termed as not amounting to exempted transactions for the limited purpose of enabling ITC, earned by those high seas traders otherwise than in this connection for further use in the payment of their further tax dues to promote seamless credit of ITC in the true spirit of GST.

Fair enough, but on the export front, no such constructive efforts seem to have gone in from the Government side, sadly.

Export of goods from duty free shops located in international airports, no matter whether or not strictly within India, are going to be made only to International passengers on charging of the value of consideration in convertible foreign currency which is the prime requisite for fulfillment of export.

The counter measure to be fulfilled equally is not to let any taxes to be exported together with the goods sold from these DFS. By harping on the definition of India to include everything under the sun, below and above air space etc., are all definitions to protect the sovereignty of the State enshrined in Article No. 1 of the Constitution of India.

One does not straight jacket one's own trade and commerce and complicate its taxation of trade transactions by stifling the DFS with those definitions and taking them through law suits and law courts to prove they are within India.

But, the long and short of it all is that their transactions are to be regarded as happening from a Customs barrier in international airport terminals in the departure and arrival modules and supply to and from it are subject to Baggage Laws and Import Export procedures of Customs.

Why drag its feet with all sorts of complicated interpretations of GST laws which will only paint GST in bad light in the eyes of International passengers.

Let the transactions made from or to DFS be honorably left free from the confusions of taxation disputes that continue to plague our domestic trade anyway.

Let the Government issue urgently clarifications like it did in the case of high seas traders in respect of these DFS to the effect that their transactions will be free from taxation, call it by any name, CGST, SGST or IGST or whatever; spare them of their credits and give us the credibility in the eyes of International passenger community and our own Indian Diaspora.

(The author is Assistant Commissioner, GST, Chennai and a Master Trainer, GST. The views expressed are strictly personal)