GST Implications on Duty-Free Shops

Introduction :

Duty-free shops (DFS) play a significant role in international travel, offering goods
such as alcohol, perfumes, and cigarettes to international passengers without the imposition
of duties or taxes. This exemption provides DFS a competitive edge by offering products at
lower prices. Before the implementation of the Goods and Services Tax (GST) regime, the
Supreme Court's ruling in the case of Hotel Ashoka v. The Assistant Commissioner of
Commercial Taxes clarified the tax implications on DFS. 1 The court interpreted Section 5(1)
of the CST Act, 1956 stating that the sale or purchase of goods shall be deemed to take place
in the course of imports of the goods into the territory of India only if the sale or purchase
takes place before the goods cross the customs frontier. It is not disputed that duty-free shops
are not within the customs frontiers. Since duty-free shops are located outside the customs
frontiers, Article 289 of the Constitution prohibits states from imposing taxes on sales or
purchases of goods that lie outside India. As a result, the Supreme Court held that sales in
duty-free shops are not subject to sales tax.

Implication of GST on DFS:

Provisions related :

Section 2(79) of The Central Goods and Services Tax Act, 2017 defines ‘non-taxable
territory’ as a territory that is outside the taxable territory. Whereas, under section 2(109),
"taxable territory" means the territory to which the provisions of this Act apply. Similarly, a
'non-taxable supply' is defined under Section 2(78) as a supply of goods or services or both
that is not subject to tax under the CGST Act or IGST Act. Additionally, Section 2(4) of the
IGST Act defines the 'customs frontier of India' as the limits of the customs area as defined in
Section 2 of the Customs Act, 1962. The 'customs area' is defined in Section 2 of the Customs
Act, 1962, as the area of a customs station and includes any area where imported or exported
goods are usually kept before clearance by customs authorities.

Controversy of the AAR ruling:

After the GST regime, the taxability of the DFS has been a matter of debate in various
courts. The bench of Delhi Appellate Authority for Advance Ruling in M/s.Rod Retail
Private Limited held that the supply of goods to outbound passengers through the retail/duty-
free shops of the applicant was located near the security hold area of T3, Delhi Airport is
within the definition of taxable territory and when read in conjunction with the section 7 of
CGST Act, 2017 forms “supply” and attracts the applicable GST on the date of supply. 2

After this, changes have been made to the GST provisions to allow for the refund of
GST paid on goods supplied to international outbound passengers 3. One change was the
exemption of goods supplied by retail shops located in the departure area of international
airports beyond immigration counters to outgoing international tourists, effective from
1.07.2019. Following this, Rule 95A was introduced under the authority of Section 55,
permitting the refund of GST paid on indigenous goods purchased and provided to these
1
(2012) 3 SCC 204
2
Advance Ruling No. 01/DAAR/2018
3
11/2019-Integrated Tax (Rate) ,dt. 29-06-2019.
tourists. An 'outgoing international tourist' was defined as an individual not typically residing
in India, visiting for no more than six months for valid non-immigrant reasons. However,
Rule 95A of CGST Rules 2017 has been omitted effective from 1.07.2019. 4

After the 47th GST council meeting, a recommendation was put forward to treat
supplies from Duty-Free Shops (DFS) at international terminals to outgoing international
passengers as exports by DFS. This would entitle them to the consequential refund benefits
on such supplies.5 Amendments were made to the GST provisions to enable the refund of
GST paid on the procurement of goods and services, considering supplies made by duty-free
shops (DFS) at airports as 'zero-rated supply'.

The jurisprudence of High Courts and Supreme Court:

In the Sandeep Patil case, the court addressed two types of transactions related to Duty-Free
Shops (DFS): 6

1. Sales by Duty-Free Shops to departing passengers- Section 2(5) of the IGST Act
defines "export" to mean "taking goods out of India to a place outside India". Given
the above, we are satisfied that supply by the DFS of the Petitioner to the outbound
passenger constitutes exports by the DFS. Consequently, in terms of section 16(1) of
the IGST Act, it becomes a zero-rated supply.
2. Sales by Duty-Free Shops to Arriving passengers - The court explained that the
supply of goods from arrival DFSs is also considered an export by the central
government, as per the central government vide order dated 31st August 2018 in
Aarish Altaf Tinwala,7 held that supply of goods from the arrival DFSs is treated as an
export by DFSs, and the passenger who buys from DFS and thereafter crosses the
customs barrier, files import declaration and becomes importer. This position has
been affirmed by the Supreme Court by rejecting the writ petition filed against the
central government order.8 Hence by legal fiction, the supply of goods from arrival
DFS would also be an export of goods under the IGST Act, and hence, a zero-rated
supply. Since the zero-rated supply qualifies for 100% ITC, the Petitioner would be
eligible for the refund.

The rationale behind the conclusions above is when goods are in bonded warehouses,
they are deemed to be outside the customs frontiers, and selling goods from duty-free shops
before they cross the customs frontiers does not constitute importation into India. DFS
located in customs airports and special warehouses are part of the customs area as defined in
the Customs Act. Goods are not considered imported into India until they or their title
documents are brought into the country. Therefore, no tax can be imposed on the supply of
such goods during their importation. Customs duty and IGST are only levied when
warehoused goods are removed from the customs area, which occurs when arriving
passengers leave the customs area. Since goods sold by DFS to arriving passengers do not
leave the customs area, DFS is not liable to pay customs duty or IGST.

4
Vide notification no.14/2022-Central Tax dated 5.07.2022.
5
Press Information Bureau. "Decisions Taken by the GST Council in its 47th Meeting held on 28.01.2022." PIB,
Government of India, 28 Jan. 2022, https://pib.gov.in/PressReleasePage.aspx?PRID=1838020
6
2019 (31) GSTL 398.
7
F.No.371/142/B/2018-RA/1391.
8
Aarish Altaf Tinwala Vs. Union of India, 2019 SCC OnLine SC 2327.
 Furthermore, the court noted that subjecting duty-free shops to local taxes would lead
to an increase in the tax burden, resulting in higher prices for goods that are meant to be tax-
free. This would hinder the ability of duty-free shops in India to compete with those in
international airports elsewhere in the world. Such a scenario could adversely impact foreign
trade and hinder the augmentation and conservation of foreign exchange.

In CIAL Duty-Free And Retail Services Ltd (Cdrsl) vs. Union Of India And Others
used the rationale in Sandeep Patil case, examining the provisions of Section 2(11) of the
Customs Act of 1962 which read with Article 286 of the Constitution of India, the
transaction of sell goods to the international passengers i.e. departing passengers or
passengers arriving into India (arriving passengers) like cigarettes, alcohol, perfumes,
chocolates and cosmetics etc…would be said to have taken place outside India.9

Further, discussing these two High Court judgments providing clarity, the Supreme
Court in the same has been affirmed in Commissioner of CGST and Central Excise Mumbai
East v. Flemingo Travel Retail Ltd held that keeping in mind the two judgments, and Article
286, duty-free shops whether in arrival or departure terminals being outside the customs
frontier cannot be saddled with Indirect tax and any such levy is unconstitutional. 10 However,
a review petition has been filed on this judgment because the submissions of the Union of
India have not been recorded. The outcome of this petition and its impact on the previously
pronounced judgment will be determined once the court delivers its decision. 11

Therefore, all the judgments and the GST council recommendations and actions
indicate that the question of levy of GST does not arise. However, Explanation to sub-section
(3) of section 17 of the CGST Act is recently amended to restrict the availment of input tax
credit in respect of certain transactions specified in para 8(a) of Schedule III of the said Act,
which is the supply of warehouse goods. 12 The explanation given by the memorandum
indicates that the Government intention of ITC reversal for the supply of warehoused goods
in the specified cases (to be prescribed by Rules).

9
2020 SCC OnLine Ker 18484.
10
2023 SCC OnLine SC 1011.
11
2023 SCC OnLine SC 144.
12
Finance Bill, 2023.