GST UPDATE ON LEVIABILITY OF IGST ON DUTY FREE SHOPS

GST UPDATE ON LEVIABILITY OF IGST ON DUTY FREE SHOPS

The Duty Free Shops (DFS) located at Airports have been showered with various exemptions from levy of taxes so that they are internationally competitive with other DFS and also to promote foreign trade and conservation of foreign exchange. With the introduction of GST regime, a big question that remained unanswered was whether IGST is leviable on the procurement of goods from foreign countries by DFS and sale of goods by DFS to international passengers travelling abroad. This question was raised by M/s Rod Retail Pvt. Ltd. [2018 (12) G.S.T.L. 206 (A.A.R.-GST)] before the Delhi Authority for Advance Ruling under GST wherein it was ruled that under GST regime, the scenario has changed and export under GST takes place only when goods are taken out to a place outside India. Hence, export takes place only when goods cross territorial waters/airspace of India and not merely on crossing the customs barriers. As DFSs are established beyond customs Frontiers but are not located outside India, sales of goods by DFS at airport do not qualify as export and IGST is payable on sale of goods by DFS. However, this issue was once again litigated by way of writ petition filed in Bombay High Court reported as Sandeep Patil Versus Union of India [2019 (31) G.S.T.L. 398 (Bom.)]. The present update seeks to discuss the reasoning adopted by the Hon’ble High Court as regards applicability of IGST on sale of goods by duty free shops (DFS). The issue regarding admissibility of input tax credit on various services procured by DFS and eligibility to claim refund of the same under Rule 89 of the CGST Rules, 2017 was also examined by this writ petition.
The observations made in this case are summarized as follows:-

DFSs are located in customs station as defined in Section 2(13) of the Customs Act, 1962. DFS are issued a special warehouse licence under Section 58A of the Customs Act and are part of ‘custom area’ as defined in the Customs Act.

Whenever goods are imported by DFS, bill of entry for warehousing is being filed under section 46 of the Customs Act and also executes a bond after which ‘space certificate’ is issued for physical storage of goods into customs bonded warehouse. When the goods move from special warehouse to DFS, the same are moved under physical supervision of proper officer. The imported goods continue to be within the custom area and are not removed for home consumption as provided for under Section 68 of the Customs Act, which is by filing an ex-bond bill of entry for clearance for home consumption on payment of duty. It, therefore, follows that all sales and supplies take place from or within the custom area.

Invoice issued by DFS at the time of sale of goods to outbound passengers, which is signed by outbound passenger and cashier clearly mentions that supply of duty free goods is with condition that passenger will not consume goods until he lands at the final destination outside India, and further that passenger shall become owner of goods only upon reaching the final destination. It is also ensured that if the passenger is not able to board the aircraft leaving India, the goods will have to be returned back to DFS whereupon the sale is declared void and refund is given to the passenger.

DFS also procures various input services such as rent, warehouse and other charges, maintenance services, CHA Services, Professional Services, etc., which are used in the course or in furtherance of its business. Hence, credit of entire GST paid on input services is available to DFS under Section 16(1) of the CGST Act and refund of the same can be claimed under Rule 89 of the CGST Rules as supplies made by DFS to outbound passengers is to be considered as export.

Reasoning adopted by the Hon’ble Bombay High Court:-

The decision given by the Hon’ble Supreme Court in India Tourism Development Corpn. Ltd. Through Hotel Ashokav. CCT, [(2012) 3 SCC 204 = 2012 (276) E.L.T. 433(S.C.)]in the matter of DFSs at international airport at Bengaluru was followed wherein it was confirmed that when goods are kept in bonded warehouses, it cannot be said that they have crossed the Customs Frontiers and so the goods sold before importation are not liable to tax. The above reasoning adopted by referring the provisions of Article 286 of the Constitution which mentions that State has no right to tax supply of goods or services where such supply takes place in the course of import of goods or services or export of goods or services or both out of the territory of India. Hence, since purchase of goods by DFS remains in customs area and the sale from DFS also takes place outside the Customs Frontiers of India, no tax can be levied on the said transactions.
It was also held that CBIC itself had clarified vide circular dated 29^th May, 2018 that the Advance Ruling given in the case of Rod Retail Private Limited is not applicable to DFS and the dispensation allowed to DFS will not be effected in any manner as the applicant in advance ruling was duty paid shop and not duty free shop.
Reliance was also placed on various judgments delivered by various High Courts by following the Supreme Court decision stated above.
With effect from 1^st February, 2019, in view of the CGST (Amendment) Act, 2018, supply of warehouse goods before clearance for home consumption have been notified/classified as activities or transactions which shall not be treated as a supply of goods. Accordingly, effective from 1^st February, 2019, sale of goods from arrival DFS falls under Entry 8(a) of Schedule III to CGST/SGST Act; and further, Section 17(2) of the CGST Act is amended according to which reversal of ITC pertaining to activity specified in Schedule-III is not required. Accordingly, DFS is eligible to claim ITC. Once this ITC is eligible, refund of entire ITC pertaining to departure and arrival is eligible, based on formula of refund prescribed in Rule 89. It was also held that since DFS located in other States are getting refund of input tax credit, there cannot be discrimination against the DFS located in the State of Maharashtra.

As regards levy of IGST on sales made to arriving passengers, it was held that arriving passenger’s baggage is exempt from the integrated tax in view of the Customs Notification No. 43/2017-Cus., dated 30th June, 2017 and IGST Notification No. 2/2017-IGST (Rate), dated 28th June, 2017. In view of the above exemption read with the duty free allowance available under the Baggage Rules applicable to arriving passengers, neither customs duty (upto the permitted baggage allowance) nor IGST is levied on such goods. Such import of goods by arriving passengers across custom frontier as passenger baggage is therefore an exempt supply under the GST, hence no IGST is payable by either the DFS on its imports, or on supply to arriving passengers. The arriving passengers are also not required to pay any IGST on crossing the custom frontiers, in view of the above exemption read with the duty free allowance under the Baggage Rules.

Hence, on the basis of above reasoning, it was concluded that the DFS is neither required to pay GST on procuring goods from foreign countries nor liable to pay GST on sale of goods to arriving/departing passengers. Furthermore, DFS is also eligible to claim ITC of various services procured by it and claim refund of the same under Rule 89 of the CGST Rules, 2017.

The above landmark decision confirms that High Courts do intervene in deserving cases inspite of the fact that alternate remedy is available to the applicant. It is pertinent to mention that consequent to amendment in Schedule III to the CGST Act, 2017, the government issued notification no. 11/2019-Integrated Tax (Rate) dated 29.06.2019 wherein exemption has been granted from levy of IGST to supply of goods by a retail outlet established in the departure area of an international airport, beyond immigration counters, to an outgoing international tourist which is applicable with effect from 01.07.2019.
This is only for educational purpose.

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GST UPDATE ON LEVIABILITY OF IGST ON DUTY FREE SHOPS

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