Taxability on goods at duty-free shops has been a subject of scrutiny. Duty-free shops (DFS) are retail outlets located at departure and arrival areas of international airports. Since they offer goods cheaper than their market price, these retail outlets are wildly popular among consumers.
People shop for an array of products, from branded watches to liquors, and many other at these duty-free shops. The supply of goods from DFS, as the name suggests, appears to be free from taxes and levies.
The taxability of inward and outward supplies of DFS has always been debatable. Under the erstwhile indirect tax regime, the Supreme Court had observed that the DFSs are located beyond the customs frontiers of India and that sales made from the DFS to the international passengers at the international airport are constitutionally exempt from tax under Article 286 of the Constitution of India.
Duty-free shops and GST
Under the Goods and Services Tax Act (GST), there is no specific exemption when it comes to DFS. Import, export, and custom frontiers have been defined identical as it is provided under the Customs Act, 1962.
According to Section 7(2) of the IGST Act, “Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce”.
Proviso to Section 5(1) of IGST Act, states that IGST on goods imported into India shall be levied and collected as per the provisions of Section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under Customs Act, 1962.
A plain reading of these provisions suggest that the supply of goods without crossing the customs frontier is treated as an interstate supply and the levy would be as per the Customs Act. Taxability under GST would also depend on the area (arrival or departure) from which goods have been supplied to the passengers.
Goods supplied from DFS at the departure terminal to outbound passengers are not cleared for home consumption. This leads to another crucial question – whether the condition of supplying goods to a place outside India is fulfilled in such a case or not?
As per the provisions of the Sale of Goods Act, 1930, every invoice issued by DFS must envisage a condition that the passenger will not consume the goods until he lands at the destination outside India.
In other words, the passenger shall become the owner of the goods only upon reaching the destination which is outside India. Accordingly, the outbound passenger is under an obligation and compulsion to carry the goods out of India as a carrier for export.
Considering the above, since the goods supplied by DFS located at the departure area are taken and consumed outside India by the passenger, such a transaction would qualify as export of goods as per the IGST Act and can be treated as zero-rated supply.
Additionally, since such supply becomes an 'export' transaction, it would not fall under the ambit of Schedule-III (supra). A similar view has been taken by various High Courts in many writ petitions.
However, in the matter of Rod Retail Pvt. Limited, Authority for Advance Ruling (AAR), Delhi has taken a contrary view and has held that supply of goods to the international passengers going abroad from the shop located in the Security Hold Area of the IGI International Airport is not export but a taxable supply under GST.
Goods from DFS at the arrival area and their taxability under GST
Until 31 January 2019, DFS used to file a bill of entry for warehousing and execute the bond at the time of importing goods. A ‘space certificate’ is issued to the DFS for physical storage of the goods in a special warehouse. No liability under customs laws gets triggered upon the filing of a bill of entry for warehousing.
The duty-free warehouse and DFS are situated within the limits of the customs area and therefore, the goods lying therein do not cross the customs frontiers. It becomes leviable to Custom Duty and IGST only upon the removal of warehoused goods from the customs area.
Considering the above, when the goods are supplied by DFS to the arriving passenger, such supply is made before crossing the customs frontiers of India, therefore, on such supply, DFS is neither liable to pay customs duty nor IGST.
Whether passengers would be liable to pay taxes on such transactions?
Although a passenger who buys goods from DFS and subsequently crosses the customs barriers of India would file an import declaration and would become an importer even then, he is not required to pay any customs duty and IGST on such goods upon crossing the customs frontiers, provided it is within the limit prescribed under baggage rules and related exemptions notifications.
Position post 1 February 2019, after amendment in Schedule - III: The Government has subsequently amended Schedule III (supra) to include the supply of warehoused goods before consumption to be neither as a supply of goods nor a supply of services. Accordingly, it can be interpreted that the supply of goods from arrival DFS would fall under Schedule III and therefore, would not be covered under the ambit of taxable supply under GST.
Admissibility and refund of Input Tax Credit
On the procurement side, Input Tax Credit (ITC) is also a key area of concern for duty-free shops. In addition to the procurement of indigenous goods, DFS procures various input services from domestic suppliers such as Custom House Agents (CHAs), Airport Operator who provides license and maintenance services, and other legal and professional services.
In absence of any upfront exemption, such service providers normally charge all the applicable taxes from DFS.
Proportionate credit reversal
As far as ITC reversal is concerned, DFS is not required to reverse any proportionate ITC in respect of the transactions which are covered under Schedule-III of the CGST Act, pursuant to insertion of an explanation in section 17(3) of the CGST Act. It may be noted that since the amendment was introduced w.e.f. February 2019 only, DFS was required to reverse the credit for the period prior to the amendment (i.e., from July 2017 to January 2019).
Refund of taxes paid on inward supplies
With effect from July 2019, certain notifications have been issued that allow, retail outlets at the departure area of international airports beyond immigration counters to claim a refund on GST paid on locally procured goods that were supplied to international outgoing passengers. This is an optional provision applicable only to indigenous goods and not applicable to imported or warehoused goods.
Presently, the issue related to taxability of DFS appears to be settled. However, if we look critically, some challenges still persists which need clarification from the Government, like, like treating supplies from arrival area as exports without analysing the test of sending goods outside India, whether supply of goods to DFS by domestic suppliers should be counted as exports, admissibility of refund to DFS for GST paid on input services (presently it is allowed only for goods). It is expected that the government would rationalise the provisions for DFSs like introducing upfront GST exemption on procurements, simplifying the procedural part etc.
While the GST on DFS goods operates on different provisions, some challenges persist such as re-claiming the credit already reversed on supplies made from arrival terminal, and admissibility of refund for tax paid on input services procured domestically, etc. It is expected that the government would bring some clarity and would simplify the provisions, by introducing a specific upfront exemption for the procurements made by DFS and by simplifying the procedures for DFS.
About the Authors: Manoj Mishra is Associate Partner, and Shubham Madaan is Manager, Indirect Taxes, Grant Thornton Bharat. Ravi Goyal, Assistant Manager, Tax, Grant Thornton Bharat also contributed to this article.
This article was originally published in ET CFO.com