India: Duty free shops, aboard the GST bandwagon


​published on July 4, 2019 | reading time approx. 3 minutes


When an international outbound passenger crosses the immigration and security check counter, he walks through an ultra-glamorous area generally designated as duty free shops. Going on a shopping spree at an International Airport is not uncommon and attracts a fair set of passenger wallets. To a layman, these duty free shops (hereinafter referred to as ‘retail outlets’) evince an area set up by the sovereign power of the country where the goods do not suffer the levy of local taxes including but not limited to the levy of Customs duty. The question here is whether this belief of tax free shopping is correct or not.



With implementation of Goods and Services Tax (‘GST’) which is a landmark indirect reform in the Republic of India, there were diverse opinions on the applicability of GST on sales that are effected to and by these retail outlets. While controversy in the erstwhile law (Value Added Tax/Central Sales Tax) was to some extent settled by the highest court in India, the nomenclature used in the GST law created scepticism about applicability of a settled proposition of the old law to a new law (question on applicability of doctrine of pari materia).

This write up discusses developments that have taken place around applicability of GST on sales made to and by these retail outlets to airline passengers.


Duty Free Shops in India – Succinct Background

The levy of Customs duty in India is triggered at the time of filing of the Bill of Entry for Home Consumption after which the goods cross the customs frontier and become part of the landmass of India. The Customs law has a provision to deposit the goods under a Custom Bonded Warehouse (instead of clearing them for home consumption) by filing a Bill of Entry for warehousing (into bond Bill of Entry). No duties of Customs are required to be paid until the goods are cleared from the said bonded warehouse by filing a Bill of Entry for Home Consumption (ex-bond Bill of Entry) and upon payment of applicable Customs duty.

The constitution of Duty Free Shops in India is also governed by the provisions of the Customs law dealing with Custom Bonded Warehouses. Special permission from Customs Authority is required in order to move the goods from a Customs Bonded Warehouse to a  duty free shops for onward sale to passengers. No duty of Customs is levied when such movement takes place, for the reason that the goods never get cleared for home consumption and do not cross the Customs frontier. Moreover, such goods without crossing the customs frontier are taken out of the country by outbound passengers. There are also cases where goods made in India (indigenous or domestic goods) are supplied to these retail outlets for onward sale to passengers.

The broad questions that now arise for consideration are whether (i) supply of goods by these retail outlets attracts the levy of GST, and (ii) supply of goods to these retail outlets attracts the levy of GST.


Judicial Dichotomy and Advance Ruling under the GST laws

Supplies by Duty Free Shops

Under the erstwhile Value Added Tax and Central Sales Tax laws, the Hon’ble Supreme Court of India had interpreted the law in order to hold that sale of goods by duty free shops, which are undisputedly beyond the Customs frontier of India, cannot be subjected to the levy of State Value Added Tax.

Under the GST regime, the controversy started with an Advance Ruling wherein a view contrary to that of the Supreme Court of India was taken. The contrary view was defended on the ground that the nomenclature used in the GST law was different from the erstwhile laws (provisions were not ipsissima verba). As a corollary, the decision of the Supreme Court of India was held as inapplicable to the GST law. The Advance Ruling upheld taxability of supplies made by a Duty Free Shop to outbound passengers holding the supply amenable to GST.

However, after the Advance Ruling, the same question faced judicial scrutiny before a Constitutional Court – the Allahabad High Court. The High Court held that sales made by Duty Free Shops are outside the ambit of the GST law and will not attract the said levy. The High Court relied on the previous judicial precedents and the express provisions of law to interpret and hold that goods supplied by the retail outlets are outside the purview of GST law.

As at today, one can follow the ruling of the High Court in order to contend that GST will not be applicable on sales made by the retail outlets. However, the ruling of a State High Court is not a binding precedent on other States.


Supplies to Duty Free Shops

A judgment was delivered by another Constitutional Court – the Madhya Pradesh High Court, wherein, it was held that supply of goods by an indigenous supplier to the retail outlets is a taxable supply and will attract the levy of GST. The said transaction will not qualify as an export for the purposes of the GST law in order to be GST free.

Per contra, the Allahabad High Court gave an exactly opposite ruling by holding that supplies made to the retail outlets will not attract the levy of GST.

These rulings lay the foundation for judicial dichotomy. The matter will not attain finality unless decided by the Supreme Court of India upon being approached in the appellate or special jurisdiction.  


GST on Retail Outlets at Departure and/or Arrival terminus?

The Allahabad High Court ruled that GST will not be applicable to sales that are made by or to the retail outlets located either at the departure or arrival terminus.

Interestingly and recently, the Government has only provided exemption from payment of GST to goods that are supplied from the Departure terminus (discussed in the latter part).

On one side, the High Court has ruled inapplicability of GST, while on the other, the Government has proceeded to issue conditional exemptions. This further creates a legal conundrum. 


GST on indigenous goods or imported goods?

The judicial ruling in public domain do not extensively discuss on difference in taxability upon supply of indigenous goods vis-à-vis imported goods at retail outlets.

However, the Advance Ruling had upheld taxability of indigenous goods supplied to these retail outlets.

Further, the Government has exempted payment of GST on sale of indigenous goods from the retail outlets . An option to claim refund has also been given on procurement. However, exemption is only available upon sales being made to ‘outgoing international tourists’.    


Amendment by the Government to bring some clarity or create confusion?

Recently, the Government of India in exercise of delegated powers proceeded to issue some exemption notifications that, inter alia, provided that supply of indigenous/ domestic goods from the retail outlets at the departures area to ‘outgoing international tourists’ against foreign exchange will be exempt from payment of GST.

Interestingly, the exemption from payment of GST indicates that the Government considers the supply to be otherwise, amenable to GST. This fact has also been categorically mentioned in a Circular issued by the Government of India. This position is contrary to the view taken by the High Court of Allahabad. Further, the exemption has only been granted to sales that take place from the departure area and that too to ‘outgoing international tourists’ only while the Allahabad High Court’s decision was absolute.

The term ‘outgoing international tourist’ has been defined to mean a person not normally resident in India who enters India for a stay of not more than 06 months for legitimate non-immigrant purposes. The first thought that would come to one’s mind would certainly be that no exemption will be available to an Indian resident purchasing indigenous goods from such retail outlets. This is for the simple reason that they cannot be called as persons who are not normally residents. 

The limited exemption is expected to bring additional responsibility on the seller since he will be now required to maintain separate record of sales to ‘outgoing international tourists’ and to other passengers. In addition, the exemption somewhat also casts a responsibility upon the seller to scrutinize if the passenger qualifies for an exemption or not.

The notification also provides for refund of the GST that was paid by the retail outlet upon procurement of the indigenous goods. The refund will be permitted only upon supply of the procured indigenous goods to ‘outgoing international tourists’. Detailed guidelines and manner of claiming the refund has been issued in public domain.


Applicability of GST on the said transactions – An unsolved puzzle

After having considered the above developments, it can clearly be seen that certain confusions have now enveloped around duty free shops. In order to avoid confusion amongst stake holders and to curtail the scope of litigation, it is imperative for the Government to come out with suitable clarifications on the topic.    


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