There has been a confusion as to whether supply by duty-free shops or supply to duty-free shops in India attracts GST or not. This paper is an attempt to understand the legal position in the light of prevailing law and recent judgments.
Under the provisions of erstwhile Central Sales Tax Act, an issue had arisen on the sales made from the Duty-Free Shops to the International passengers at the International Airport and the Supreme Court, in the case of M/s. Hotel Ashoka (Indian Tourism Development Corporation Limited) v. Assistant Commissioner of Commercial Taxes and Another, decided on 3-2-2012 [2012 (276) E.L.T. 433 (S.C.)] expressed a view that such sales are constitutionally exempt from tax under Article 286 of the Constitution of India, being sales in the course of export out of India within the meaning of Section 5(1) of the CST Act. The Apex Court in the said decision took note of the fact that Duty Free Shops are located in a Zone which is entered by crossing the Customs Frontier of India, i.e. they are not within the Customs Frontiers of India and any sales from the said area is duly covered under Section 5(1) of the CST Act. The Apex Court further opined, that, submissions with regard to sale not taking effect by transfer of documents of title to the goods is one of the methods whereby delivery of the goods is effected. Delivery may be physical also. In the case of the duty-free shops which are outside the Customs Frontiers of India, the goods have been sold to the customers by giving physical delivery. Hence, the territorial extent of India starts after crossing the Customs limits. The Hon’ble Supreme Court has held that when any transaction takes place outside the Customs Frontiers of India, the transaction would be said to have taken place outside India.
Under GST Law, Export of goods has been defined in Section 2(5) of the IGST Act, as, “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India. India has been defined in Section 2(56) of the CGST Act, which reads as, “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the airspace above its territory and territorial waters. Taking these provisions in consideration, the Advance Ruling Authority of Delhi, in case of In Re: Rod Retail Pvt. Ltd. [2018 (12) G.S.T.L. 206 (A.A.R. – GST)] held that supply of goods to the International passengers going abroad from duty-free shops may be taking place beyond Customs Frontiers of India as defined under Section 2(4) of the IGST Act, 2017. However, the said outlet is not outside India, the same is within the territory of India as defined under Section 2(56) of the CGST Act, 2017 and hence the applicant is not taking goods out of India and 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.
As per Section 7 (2) of the IGST Act, the supply of goods imported into India, till they cross customs frontier of India, shall be treated to be the supply of goods in course of inter-State trade or commerce. Further as per Section 8(1) (ii), goods imported into the territory of India till they cross the customs frontiers of India will not be treated as Intra State supply of goods. These provisions are not helpful as it is not a question of Intra-state or Inter-state supply. In both the cases, GST is payable, and states will get its own share of revenue. Same is true for supply from any custom bonded warehouse, or even High Seas sales if the same happens in the area designated as “India”.
Recently Madhya Pradesh High Court held that supplies to duty free shops is taxable under GST as “a duty-free shop situated at the airport cannot be treated as territory out of India” [Vasu Clothing Pvt. Ltd. v. Union of India – 2018 (19) G.S.T.L. J73 (M.P.)]. Supply to duty free shops is not exporting goods out of India.
Schedule III of the CGST Act provides for supplies which shall not be treated as supply of goods or services. CGST Act has been amended vide Amendment Act of 2018 [likely to be effective with effect from 01.02.2019 as directed by 31st meeting of GST Council], which has included following supply in Schedule-III,
“8(a) Supply of warehoused goods to any person before clearance for home consumption”.
Further the “Explanation 2” provides that for the purposes of paragraph 8, the expression “warehoused goods” shall have the same meaning as assigned to it in the Customs Act, 1962.
Duty free shops are not custom bonded warehouses. Thus, it is doubtful that such sale from such duty-free shops shall be treated as supply not subject to GST. Further, supplies to duty free shops shall not be treated as export of goods as it shall not amount taking goods outside India. In view of these it appears that supply from duty free shops and supply to duty free shops shall be treated as taxable supply under GST.
[The author is Managing Partner of Rajesh Kumar & Associates. The author can be contacted on firstname.lastname@example.org]