In a notable judgment, the Allahabad High Court has explained the reasons for exempting Duty Free Shops(DFS) in airports from Goods and Services Tax (GST).
The Court was considering a PIL filed by one Atin Krishna, who contended that the exemption given to Duty Free Shops from GST was based on a misinterpretation of law.
According to him, the supply of goods from the DFS are liable to CGST and SGST as they take place within the territorial limits of India. The petitioner submitted that a transaction must suffer Integrated Goods and Service Tax(IGST) the moment the supply of goods crossed the territorial waters of India. Also, the sale made to international passengers at the arrival terminal DFS should be considered as intra state supply of goods and accordingly, such sale shall attract applicable CGST and SGST, contended the petitioner.
The Division Bench of Justices Pankaj Kumar Jaiswal and Rajnish Kumar did not agree with these contentions. It noticed that the supply of imported goods to and from the DFS did not cross the customs frontier of India. Therefore, supply of goods to and from the DFS is to be regarded as supply of goods in course of inter-state trade or commerce as per Section 7(2) of the Integrated Goods and Services Tax Act 2017 (IGST Act). This means that such supply is not regarded as inter-state supply which is leviable under the CGST and SGST Acts, and will be governed by IGST Act.
The Court further took note of the proviso to Section 5(1) of the IGST Act, which deals with the levy on goods imported into India. As per this section, integrated tax on goods imported into India should be levied and collected in terms of Section 3 of the Customs Tariff Act 1975.
This tax is required to be levied at the point when when such goods are cleared for home consumption, as per Section 12 of the Customs Act 1962.
Based on the precedents laid down by the Supreme Court, the Division Bench said :
"the effective taxable event for the purpose of levy of Customs Duty is the time only when the goods cross the customs barrier and the bill of entry for home consumption is filed i.e. when the goods become part of the mass of goods within the country".
The taxable event occurs when the goods cross the customs frontiers of India. Therefore, when the goods are imported from outside India and are kept in customs warehouse and exported therefrom, the stage for payment of customs duty under Customs Act, 1962 does not arise. Hence neither Custom duty nor IGST is payable.
Sale to departing passengers will be 'export'
As regard the supply of goods from DFS to departing passengers from departure terminal, the Court observed that such goods are not cleared for home consumption and hence will not attract GST
"The supply of warehoused goods by the DFS at the departure terminal is to departing International passengers i.e. the passengers travelling from India to a foreign destination. Thus, the goods supplied are never cleared for home consumption and the warehoused goods are exported by the DFS, therefore the levy Customs duty and of the IGST do not arise", said the bench.
The invoice issued to passenger at International departure terminal is deemed to be a "shipping bill" for the purpose of exports under Section 69 of the Customs Act .
The sale/supply at the DFS of international departure terminals would be export of goods under Customs Law and therefore will be considered as exports of goods under GST Act, since the definition of "export" and "export of goods" under both the laws is the same.
The petitioner contended that it cannot be regarded as 'export' as there was no specific destination.
Rejecting this, the Court said that in the case of sale from DFS, the destination is the foreign destination of the foreign going passenger and the passenger also acts as a carrier.
When goods are sold to arriving passengers
The Court also discussed the scenario of arriving passengers purchasing goods from DFS at the arrival terminal of the airport.
In that situation, the supply of goods to arriving passengers take place before clearance for home consumption. The arriving passengers thereafter cross the customs frontier at the airport along with the goods and only then clears the same for home consumption. The passenger is therefore liable to pay the applicable duties of customs.
The goods being a part of passenger's bonafide baggage are cleared for home consumption by the passenger under the Baggage Rules, 2016 and not by the DFS. Hence no customs duty is payable by the DFS.
Duty Free Shops entitled to input tax credit
The petitioner also pointed out that the duty free shop was claiming refund of Input Tax Credit (ITC) of GST paid on service of renting of immovable property by Airport Authority of India and procurement of domestic goods and services. This refund is being granted under the grounds that the sale made to the International passengers at the departure terminal DFS is exports of goods and hence zero-rated. The sale invoice issued to the International passengers is being considered as proof of exports of goods. According to the petitioner, this practice was illegal.
Disagreeing with the petitioner, the Court held that export of goods is a zero rated supply and a person making zero rated supplies can claim refund of unutilised ITC as provided in Section 16 (1) and Section 16 (3) of the IGST Act.
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