India-UK CETA, DGFT Clarification and GST: Trade and Tax Intersections

Cross-border Trade and Domestic Tax Procedure- India-UK CETA, DGFT’s Warehousing Clarification and the GST Intersections

1. Introduction

The month of August 2025 has been a defining moment for India’s indirect tax and trade regime. Two seemingly separate developments, the signing of the India-United Kingdom Comprehensive Economic and Trade Agreement (CETA) and the Directorate General of Foreign Trade’s (DGFT) Circular No. 02/2025-26 dated July 22, 2025, together reshape how goods move across borders and how taxes attach to those movements.

On the one hand, CETA promises duty-free access for 99% of India’s exports to the UK and simplifies compliance through self-certification of origin. On the other hand, DGFT’s circular clarifies that imports shipped before the grant of authorisation but cleared afterward may be directly released for home consumption, without the erstwhile mandatory warehousing.

At first glance, these are facilitative measures. Yet, when examined through the prism of the Central Goods and Services Tax Act, 2017 (“CGST Act”), the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), and the Foreign Trade Policy, 2023 (“FTP”), both developments open doctrinal and practical questions. These questions range from the timing of supply under Sections 12 and 13 of the CGST Act, to valuation under Section 15, to refund of input tax credit under Section 54, and even to constitutional guarantees under Article 265 of the Constitution of India.

This commentary attempts to map these intersections and argue that unless harmonisation is achieved, the very mechanisms designed to boost trade may become new grounds for litigation.

2. India-UK CETA- New Trade Architecture

The India-UK CETA, signed in accordance with Article XXIV of GATT 1994 and Article V of GATS, aims to secure preferential access for Indian exporters in the UK market. The treaty grants-

• Duty-free access for nearly 100% of trade value, including labour-intensive sectors such as textiles, leather, and marine products, as well as high-growth sectors like pharmaceuticals, electronics, and auto components.
• Simplified Rules of Origin (“RoO”), allowing exporters to self-certify the origin of goods, with product-specific rules for sensitive sectors.
• Professional mobility for service providers and mutual recognition agreements for qualifications, set to be operational within twelve months.

While these provisions are economically significant, they cannot be divorced from the indirect tax architecture at the border. The RoO self-certification mechanism, in particular, interacts directly with customs assessments and IGST levy on imports.

Under Section 3(7) of the Customs Tariff Act, 1975, integrated tax is levied on imported goods at the point of customs clearance. The assessable value under Section 14 of the Customs Act, 1962 includes the duty payable, which in turn is affected by the preferential duty claim under CETA. If an exporter’s self-certification is later rejected during post-clearance audit, the preferential duty exemption collapses, thereby increasing both the customs duty payable and the IGST leviable.

Thus, while CETA reduces barriers ex ante, it simultaneously increases the risk of retrospective liability ex post. Exporters and importers must be alert not only to the substantive requirements of the treaty but also to the documentary expectations of customs authorities under Section 17 (self-assessment) and Section 28 (demand for duty not levied) of the Customs Act.

3. Rules of Origin and GST Interaction

The RoO under CETA is not merely a customs concern; they directly impact GST entitlements. Under Section 16 of the IGST Act, 2017, exports are treated as zero-rated supplies, entitling exporters to claim refund of input tax credit under Section 54 of the CGST Act. However, this entitlement presupposes that the export is validly classified as zero-rated.

If, during a post-clearance audit, the customs authorities reject the RoO self-certification and deny preferential treatment, two consequences follow-

1. Customs duty demand under Section 28 of the Customs Act, 1962, along with interest.

2. Possible denial of zero-rating under GST, on the ground that the underlying export did not meet the treaty conditions, leading to disallowance of refund claims.

This creates a practical tension. While the FTP 2023 (Para 2.12) and DGFT’s clarifications aim to simplify procedures, the GST framework continues to rely heavily on accurate customs assessment as a trigger for refunds. Thus, exporters face a dual risk, reassessment of duty and denial of GST refunds, both flowing from the same RoO determination.

4. DGFT Circular No. 02/2025-26- Warehousing Clarification

Turning to imports, DGFT issued Circular No. 02/2025-26 dated July 22, 2025, clarifying the scope of Para 2.12 of FTP 2023. The provision originally permitted clearance of goods that had been shipped prior to the issuance of an authorisation, provided they were first warehoused and later cleared against the authorisation. In practice, customs authorities were insisting that such goods must be warehoused before clearance, even if the importer had already obtained the authorisation at the time of clearance.

The circular relaxes this requirement- goods shipped prior to authorisation but not yet cleared from customs may be cleared directly for home consumption against an authorisation obtained later, without mandatory warehousing. The exception applies only to “restricted items” or items routed through State Trading Enterprises.

On the surface, this clarification is taxpayer-friendly. Yet, it raises critical GST questions. When goods are cleared for home consumption without warehousing, the time of supply under Section 12(8) of the CGST Act (import of goods) read with Section 3(7) of the Customs Tariff Act becomes immediate. This means IGST liability crystallises at clearance. If later, the authorisation is questioned, the importer could be exposed to demands under Section 28 of the Customs Act and consequential denial of ITC under Section 16(2)(c) of the CGST Act (which requires that tax is actually paid to the Government).

5. Time of Supply, Authorisation, and GST Liability

The interaction between FTP and GST law hinges on the doctrine of time of supply. Under Section 12 of the CGST Act, time of supply is linked to removal of goods, while for imports, liability arises at the point of customs clearance. The DGFT’s relaxation shifts the compliance burden from warehousing to direct clearance, but this does not alter the statutory liability under the CGST and IGST Acts.

Here lies the doctrinal friction-

• Revenue’s stance- A policy circular under FTP cannot alter the incidence of tax under the CGST Act. Even if DGFT permits direct clearance, GST liability arises when goods are cleared for home consumption.
• Taxpayer’s counter- Circulars are binding on the Department. If taxpayers act in accordance with a facilitative circular, subsequent penalisation violates Article 265 of the Constitution, which prohibits retention of tax without authority of law, and the principle of legitimate expectation.

This is not a theoretical debate. Similar arguments succeeded in Eicher Motors Ltd. v. Union of India (1999) 106 ELT 3 (SC), where the Supreme Court held that credit lawfully accrued cannot be denied absent express statutory authority.

6. Valuation and Refund Consequences

The implications of CETA’s preferential duty structure and DGFT’s warehousing clarification go beyond customs law; they directly influence the computation of GST and the availability of refunds.

6.1 Assessable Value and IGST Levy

• Under Section 3(7) of the Customs Tariff Act, 1975, integrated tax (IGST) is levied on imported goods on a value determined under Section 14 of the Customs Act, 1962 plus applicable customs duties. Where CETA provides for duty-free access, the customs duty component is nil. This reduces the assessable value for IGST, thereby lowering both liability and available input tax credit (ITC).
• If, however, during post-clearance audit the self-certified origin is denied, the duty component is retrospectively added. This inflates the assessable value, increasing IGST liability. As per Section 16(2)(c) of the CGST Act, ITC is available only if tax is actually paid. Thus, additional IGST, once paid, can be claimed as credit, but refunds already sanctioned under Section 54(3) may be reopened.

6.2 Refund of ITC on Exports

Exporters under CETA typically claim refund of unutilised ITC under Rule 89 of the CGST Rules, 2017. The refund formula in Rule 89(4) ties the refund amount to the value of zero-rated supply. Any retrospective reclassification of exports (e.g., denial of preferential status) distorts this formula. Consequently, exporters may face recovery notices under Section 73 or 74 of the CGST Act for refunds already granted.

6.3 Worked Example A, Exporter under CETA

• FOB value of textiles exported- ₹10,00,000
• Preferential duty under CETA- Nil
• IGST paid on inputs- ₹1,80,000 (unutilised credit claimed as refund under Section 54(3))

Scenario 1, Self-certification accepted-

• Export remains zero-rated under Section 16 of IGST Act.
• Refund of ₹1,80,000 sanctioned under Rule 89(4).

Scenario 2, Self-certification denied in post-audit-

• Customs duty @ 10% = ₹1,00,000 retrospectively payable.
• IGST @ 18% on reassessed value = ₹1,98,000 (instead of nil).
• Department reopens refund claim, alleging mis-declaration. Exporter faces demand of ₹1,80,000 already refunded + interest under Section 50.

This illustrates how preferential access under CETA can transform from a working-capital relief to a contingent liability.

6.4 Worked Example B, Import under DGFT Circular

• CIF value of machinery- ₹50,00,000
• Import shipped before authorisation but cleared after, thereby invoking Circular No. 02/2025-26.
• Customs duty @ 7.5% = ₹3,75,000
• IGST @ 18% on (₹50,00,000 + ₹3,75,000) = ₹9,67,500

Scenario 1, Authorisation accepted at clearance-

• ITC of ₹9,67,500 validly available under Section 16(1) CGST Act.

Scenario 2, Authorisation later challenged-

• Duty demand of ₹3,75,000 (if exemption disallowed) + penalty under Section 112 of Customs Act.
• IGST credit of ₹9,67,500 may be disputed on ground of ineligible import, exposing importer to reversal under Section 17(5) CGST Act.

Thus, the DGFT circular’s relief from warehousing does not immunise taxpayers from downstream GST disputes if the authorisation is later invalidated.

6.5 Practical Implication

The valuation-refund interplay demonstrates a classic give with one hand, take with the other situation. While policy announcements promote trade facilitation, the statutory mechanics of GST and customs law continue to operate rigidly. Unless synchronisation between FTP, the Customs Act, and the CGST/IGST Acts is undertaken, taxpayers will remain vulnerable to refund reversals and retrospective demands.

7. Constitutional and Doctrinal Issues

While the valuation and refund mechanics highlight practical risks, the deeper challenge lies in reconciling statutory authority with administrative practice. Both CETA’s self-certification regime and DGFT’s warehousing clarification throw up constitutional and doctrinal concerns.

7.1 Article 265, No Tax Without Authority of Law

Article 265 of the Constitution of India mandates- “No tax shall be levied or collected except by authority of law.” This principle protects taxpayers from arbitrary exactions. If exporters/importers act strictly in accordance with CETA or DGFT’s Circular No. 02/2025-26, and the Department subsequently reopens assessments or demands retrospective duty, the question arises whether such demands satisfy Article 265.

Courts have repeatedly held that retention of money without explicit statutory backing is unconstitutional. In Eicher Motors Ltd. v. Union of India, (1999) 106 ELT 3 (SC), the Supreme Court recognised input tax credit as a vested right which cannot be extinguished without express authority. Similarly, in SICPA India Pvt. Ltd. v. Union of India (Sikkim HC, 2023), refund of ITC on business closure was allowed by reading Section 49(6) of the CGST Act independently of Section 54(3). These cases emphasise that legislative silence cannot justify revenue retention.

7.2 Legitimate Expectation and Administrative Circulars

Taxpayers who rely on DGFT’s circular or on treaty commitments develop a legitimate expectation that their conduct is legally valid. Administrative circulars are binding on the Department, as reaffirmed in CCE v. Ratan Melting & Wire Industries, (2008) 13 SCC 1. Consequently, penalising taxpayers who follow such guidance risks violating both fairness principles and legitimate expectation.

7.3 Doctrine of Harmonious Construction

The overlap of FTP 2023, Customs Act, 1962, and CGST/IGST Acts, 2017 requires harmonious construction. Section 2(33) of the Customs Act defines “prohibited goods,” while Para 2.12 of FTP allows clearance of goods imported prior to authorisation. These must be read alongside Sections 12 and 16 of the CGST Act to avoid double taxation or denial of ITC. Courts are likely to adopt an interpretation that furthers trade facilitation rather than frustrates it.

7.4 Risk of Double Taxation

Another doctrinal issue is the risk of double incidence. For example, if preferential duty is retrospectively denied and IGST is recalculated, taxpayers may face recovery of both customs duty and reversal of GST refunds already sanctioned. Unless Parliament or the GST Council issues clarificatory amendments, such double exposure can be challenged as excessive and beyond legislative intent.

8. Practical Compliance Challenges

While the constitutional and doctrinal debates will eventually reach the higher judiciary, businesses cannot wait for jurisprudence to settle. The immediate concern is how exporters and importers should navigate the grey zones created by CETA and DGFT’s circular.

8.1 Documentation Burden Under Self-Certification

CETA’s shift to self-certification of origin appears facilitative, but it transfers the evidentiary burden to exporters. Under Section 17 of the Customs Act, 1962 (self-assessment), exporters must ensure that their claim of preferential origin is backed by-

• Production records,
• Input invoices, and
• Manufacturing cost sheets.

In the absence of robust documentation, customs authorities may reject the preferential claim and initiate demand under Section 28 of the Customs Act. For GST purposes, this could also unravel refunds already claimed under Section 54(3) of the CGST Act.

8.2 Timing and ITC Eligibility for Importers

The DGFT’s clarification allows importers to bypass warehousing. However, under Section 16(2) of the CGST Act, ITC is available only when tax has been “actually paid” to the Government. If authorisation validity is later disputed, ITC availed at the time of clearance risks reversal under Section 17(5). This creates a working-capital trap- businesses enjoy credit upfront but may face clawbacks months later.

8.3 Refund Uncertainty for Exporters

For exporters, the biggest challenge lies in reconciling Rule 89 refund claims with the uncertainty of preferential origin acceptance. A refund granted today can be reopened tomorrow if customs denies origin. Since Section 73(1) of the CGST Act allows reopening within three years, businesses must maintain refund-related documentation long after the transaction is closed.

8.4 Overlap of Forums and Multiplicity of Proceedings

Another compliance burden arises from the overlap of forums-

• Customs disputes go to Commissioner (Appeals), then CESTAT.
• GST disputes follow a separate appellate chain.
• FTP-related disputes often land in High Courts under writ jurisdiction.

Thus, a single consignment can embroil a taxpayer in parallel litigation streams, each demanding different documentation and strategies.

8.5 Professional and Contractual Risks

For service providers such as customs brokers and GST consultants, professional liability is significant. Incorrect advice on eligibility of self-certification or clearance procedure can expose them to contractual claims from clients. Similarly, corporates must embed indemnity clauses in contracts with overseas buyers or suppliers to shield themselves from retrospective duty and GST demands.

9. Litigation Outlook and Anticipated Disputes

Given the statutory overlaps and administrative ambiguities, disputes are inevitable. Several categories of litigation are likely to emerge in the aftermath of India-UK CETA and DGFT Circular No. 02/2025-26.

9.1 Origin Verification and Retrospective Demands

The most immediate litigation will arise from post-clearance audits under Section 17(6) of the Customs Act, 1962, where customs authorities question the validity of self-certified origin. A negative finding can trigger demands under Section 28, coupled with penalties under Section 112. Exporters will challenge such demands by invoking Article 265 and the principle of legitimate expectation, arguing that reliance on treaty mechanisms cannot be penalised absent fraud or misrepresentation.

9.2 Refund Reopenings under GST

As seen in Section 6, denial of origin will automatically cast doubt on refunds claimed under Rule 89 of the CGST Rules, 2017. Revenue is likely to issue notices under Section 73 (non-fraud cases) or Section 74 (fraud cases). Taxpayers will argue that once refunds are sanctioned based on contemporaneous documentation, reopening them based on later customs findings violates finality principles and creates double jeopardy.

9.3 Disputes on the Scope of DGFT’s Circular

DGFT’s Circular No. 02/2025-26 clarifies Para 2.12 of FTP 2023. Yet, customs authorities may continue insisting on warehousing as a matter of administrative practice. This will likely lead to writ petitions before High Courts challenging the binding effect of DGFT circulars vis-à-vis customs practice. The central issue will be whether an FTP circular can indirectly modify the time of supply and IGST liability under Sections 12 and 13 of the CGST Act.

9.4 Multiplicity of Proceedings

A key litigation risk is multiplicity-

• Customs demand → Commissioner (Appeals) → CESTAT → High Court under Section 130.
• GST refund denial → Adjudication under Section 73/74 → Appellate Authority under Section 107 → Appellate Tribunal (once constituted) → High Court.
• FTP interpretation → Direct writ jurisdiction in High Courts.

This fragmentation increases cost and uncertainty. Taxpayers will likely push for judicial consolidation of disputes to avoid conflicting outcomes.

9.5 Anticipated Judicial Approach

Based on precedents like Eicher Motors and SICPA India (Sikkim HC, 2023), courts are likely to-

• Lean in favour of protecting vested rights such as ITC and refunds.
• Hold that administrative circulars create binding legitimate expectations.
• Insist that any denial of benefit must be rooted in express statutory prohibition, not mere administrative discretion.

However, until the Supreme Court settles these issues, divergence across High Courts is inevitable. States with major trade hubs, Bombay, Delhi, Madras, and Gujarat High Courts, are expected to be the earliest battlegrounds.

10. Compliance Checklist for Businesses

To navigate the uncertainties around CETA implementation and DGFT’s warehousing clarification, businesses should adopt a layered compliance strategy that addresses customs, GST, and FTP simultaneously. The following checklist can serve as a practical guide-

10.1 For Exporters (CETA Self-Certification)

– Maintain robust origin documentation- production records, input invoices, and cost sheets, to satisfy customs audits under Section 17(6) of the Customs Act, 1962.

– Cross-check product-specific RoO before self-certifying, to avoid post-clearance denial.

– File refund applications with redundancy- accompany Rule 89 claims with CETA documentation to pre-empt reopening under Section 73 of the CGST Act.

– Keep refund records beyond statutory limits- since refunds may be questioned up to three years, retain supporting evidence for at least five years.

– Contractual indemnity clauses- in agreements with overseas buyers, incorporate provisions to share liability in case of retrospective duty demands.

10.2 For Importers (DGFT Circular No. 02/2025-26)

– Retain copies of authorisations and clearance documents- link them to bills of lading and bills of entry to prove compliance with Para 2.12 of FTP 2023.

– Record contemporaneous reliance on DGFT circular- to strengthen the defence of legitimate expectation if revenue questions clearance without warehousing.

– Track ITC availment closely- reconcile ITC claimed under Section 16(1) of the CGST Act with actual duty/IGST payments reflected in customs records.

– Segregate restricted items- ensure that any import falling under State Trading Enterprises or restricted categories is warehoused to avoid violations.

– Pre-clearance internal audits- conduct mock compliance checks before direct clearance to home consumption.

10.3 For Tax Professionals and Advisors

– Issue written advisories referencing statutory provisions (Sections 12, 16, 54 CGST Act; Section 28 Customs Act; Para 2.12 FTP). This protects both client and advisor in case of later disputes.

– Monitor High Court rulings across jurisdictions- divergence is inevitable; early awareness can help structure claims and defences.

– Educate clients on litigation timelines- parallel proceedings under GST and customs will be resource-intensive.

– Build litigation reserves- advise clients to set aside provisions for potential refund reversals or retrospective duty demands.

– Engage industry associations- collective representations to the GST Council and DGFT can accelerate clarifications.

11. Conclusion

The India-UK CETA and the DGFT’s Circular No. 02/2025-26 are important steps in India’s trade and tax journey. Both measures promise facilitation, CETA by opening preferential access and mobility, and DGFT by easing clearance of goods without mandatory warehousing. Yet, the true test lies not in the intent of these policies but in their interaction with the statutory architecture of the Customs Act, 1962, the CGST Act, 2017, the IGST Act, 2017, and the FTP 2023.

The risks identified, retrospective duty demands under Section 28 of the Customs Act, refund reopenings under Sections 73 and 74 of the CGST Act, ITC reversals under Section 17(5), and constitutional challenges under Article 265, all point to one conclusion- facilitation without harmonisation creates fertile ground for disputes.

Businesses cannot afford to treat these developments as mere policy updates. They must instead adopt proactive compliance, detailed documentation, and contractual safeguards. At the same time, policymakers should not ignore the constitutional and doctrinal tensions. Clear legislative amendments, uniform administrative guidance, and procedural safe harbours are essential if trade liberalisation is not to be undermined by litigation.

India’s tax and trade framework stands at an inflection point. The success of CETA and DGFT’s liberalisation will depend on whether the law can balance economic ambition with doctrinal certainty. Until then, practitioners and corporates alike must walk the fine line between opportunity and exposure.