International passengers need not pay GST at airport ‘duty-free’ shops

Following an order passed in March by the New Delhi bench of the Authority for Advance Ruling (AAR) stating that GST would be leviable on sale of goods from ‘duty-free’ shops at airports, the revenue department had received a number of representations seeking clarification on the issue.

“The position of the revenue department has always been that we cannot export our taxes. We will issue clarification stating that duty free shops would not levy GST,” the official said.

The revenue department will clarify that duty-free shops will have to only collect a copy of the passport from the passenger to whom it sells the goods and later on seek GST refund from the government, the official added.

This means, like exporters, duty-free shops can claim refund from the government for the GST it has paid in procuring goods from manufacturers. The copy of passport will be treated as proof of sale of the goods.

Experts said the Authority for Advance Ruling (AAR) order had put such shops in a fix, since they were exempt from central sales tax (CST) and value added tax (VAT) in the earlier indirect tax regime. 

In the erstwhile regime, sale from such shops were considered as exports and supplies were taking place beyond the ‘customs frontiers’ of India.

AMRG & Associates Partner Rajat Mohan said ‘Duty-free’ shops enjoy a tax neutral status globally as a matter of International understanding.

“The GST policy wing is planning to come out with a circular clarifying on the zero-rating status of such Duty Free shops and circular may also outlay a detailed procedure of claiming refund of the taxes so paid,” Mohan said.

EY Partner Abhishek Jain said such transactions are akin to exports and it is a stated policy that tax should not be levied on export of goods. “This would bring a lot of relief to duty free shops and would keep them competitive with duty free shops in other countries,” Jain added.

The AAR held that the supply of goods to international passengers going abroad from ‘duty free’ shops are happening within the territory of India under the Central GST Act.

Since the ‘duty free’ shops are situated within the territory of India and was not taking goods out of India, 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.

Under section 2(5) of the IGST Act, export of goods takes place only when goods are taken out to a place outside India. The country is defined under Section 2(27) of the Customs Act as “India includes the territorial waters of India”.

Under Section 2(56) of the CGST Act, India means the territory of India, including its territorial waters and the air space above its territory and territorial waters.

Hence, the goods can be said to be exported only when they cross the territorial waters of India and the goods cannot be called to be exported merely on crossing the Customs Frontiers of India, as per the discussions before the AAR.

The Delhi AAR in case of ROD Retail Private Ltd ruled against the age-old policy of not levying taxes on them by ordering that GST will be payable by duty-free shops in India.