India: Interplay Of Goods And Services Tax Laws Vis-A-Vis Customs Laws

This article has been co-authored by Ms. Sanchita Rungta (Senior Associate) with Ms. Palak Shah (Associate) .

There is no doubt, the introduction of GST has allowed its effects to be felt in other Laws, including the Customs Law. This article highlights, via illustrations, the strong interplay of GST and Customs in relation to international trade transactions.

Valuation

As per the provisions of Section 14 of the Customs Act, 1962 (Customs Act) read with Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (Customs Valuation Rules), the value of the imported goods is the transaction value of such goods where the buyer and seller of the goods are not related and price is the sole consideration for the sale. Specific additions to the transaction value are prescribed under Rule 10 of the Customs Valuation Rules. Given that value of certain services is included in the transaction value of imported goods, there is double taxation per se in respect of those services wherein there is no exemption of IGST on the services which already form part of the transaction value of the imported goods.

Under the GST regime, certain instances of transactions where there is an element of double taxation are given below:

Levy of IGST on Ocean Freight

One of the most contentious issues under the GST regime, which is affecting almost all importers across industries, is whether the importers are liable to pay IGST under Reverse Charge Mechanism (RCM) on ocean freight paid for services of transportation of goods up to customs station of clearance in India, provided by a person located in a non-taxable territory. This is, even if such freight is a part of CIF value of imported goods on which the applicable Customs duty along with IGST (as a component of Customs duty) is already paid. Various Advance Rulings have been pronounced clarifying that the importer is liable to pay IGST on RCM basis on ocean freight even if such freight is part of CIF value of imported goods [TS-479-AAR-2019-NT], [TS-475-AAR-2018-NT] and [TS-245-AAR-2018-NT]¹. While multiple writ petitions have been admitted across various High Courts in India challenging the levy of IGST on ocean freight under RCM inter alia on the ground that the same amounts to double taxation [TS-962-HC-2018(GUJ)-NT], [TS-345-HC-2019(GUJ)-NT] and [TS-361-HC-2019(HP)-NT]², the final outcome of the petitions is still awaited.

Double taxation of service imports in certain other cases

Valuation provisions under Customs require adding value of certain services on to the transaction value of imported goods for the purpose of payment of Customs duty. In line with the same, exemption from payment of IGST under RCM has been granted to royalty and license fee to the extent that the same is included in the value of goods imported on which IGST (as a component of Customs duty) is paid³. However, no such exemption is currently available qua other services (such as commissions and brokerage, engineering, design work) which form a part of transaction value and wherein Customs duty and IGST (as a component of Customs duty) are already paid.

This results in double taxation in respect of such services.

It is interesting to note that this double taxation goes against the fundamental principle of GST which is to curb cascading effect of taxes.

Scope and ambit of 'export' in the context of Duty-Free Shops (DFS)

Under the erstwhile Value Added Tax and Central Sales Tax laws, the Hon'ble Supreme Court of India⁴ had held that sale of goods by duty free shops at International Airports, which are undisputedly beyond the Customs frontier of India, cannot be subjected to the levy of Sales Tax.

Under the GST regime, the controversy started with an Advance Ruling pronounced by the Delhi AAR [TS-156-AAR-2018-NT]⁵ wherein a view contrary to that of the Apex Court was taken thereby holding that supplies made by a DFS to outbound passengers is amenable to GST as export under GST takes place only when goods cross territorial waters/airspace of India and not merely on crossing customs barriers. A similar view was also adopted by the Bombay High Court⁶ and Madhya Pradesh High Court⁷. However, a similar issue also came up for consideration before the Allahabad High Court⁸ wherein it was held that sales made by DFS constitute as exports as the goods are taken outside India and will not attract GST.

Given the conflicting judgments, recently, the Government of India granted exemption⁹ to any supply of goods by a retail outlet established in the departure area of an international airport, beyond the immigration counters, to an outgoing international tourist, from IGST. Interestingly, the exemption from payment of IGST indicates that the Government considers the supply to be otherwise, amenable to GST. This fact has also been categorically mentioned in a Circular¹⁰. Further, the exemption has only been granted to supplies that take place from the departure area and that too to 'outgoing international tourists'.

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 6 months for legitimate non-immigrant purposes. A natural conclusion to this would be that no exemption will be available to an Indian resident purchasing 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 DFS since they will now be required to maintain a separate record of sales to 'outgoing international tourists' and also cast a responsibility upon DFS to scrutinize if the passenger qualifies for an exemption or not.

Classification

In any indirect tax, classification of goods is very vital. The same has wide implications particularly in the case of a multi rate tax structure like GST. Customs adopt the global classification of goods, based on the Harmonised System of Nomenclature (HSN) read along with General Rules of Interpretation.

The rate Notification of goods under GST regime also adopts the classification, rules of interpretation, section notes and chapter notes as specified under the Customs Tariff Act, 1975. However, certain anomalies in classification are observed with respect to 'goods' and 'services'. For example – any Intellectual Property Right (temporary transfer) imported into India over a physical medium is considered as goods for the purposes of Customs whereas under the GST, by virtue of Entry 5(c) of Schedule II of the Central GST Act, 2017 the same is classified as service. This may lead to issues in future if there is a difference in the IGST rate, double taxation¹¹, availment of any exemption benefit restricted to goods etc.

There is no doubt, given so much ambiguity, that GST and customs laws need to align. Amongst other things it will reduce expensive and long drawn litigation. This is where regulators will need to step in.

Uncertainty in taxation laws, especially interplay between different tax laws and consequently long drawn out litigation, is a pain point with corporate India. Clarity on issues, consistency of implementing regulations and continuous dialogue between government and businesses is the need of the hour.

Footnotes

[1] IN RE: E-DP Marketing Pvt Ltd. [2019 (26) G.S.T.L. 436 (A.A.R. - GST)]; IN RE: Chambal Fertilizers & Chemicals Ltd [2018 (17) G.S.T.L. 526 (A.A.R. - GST)]; IN RE: Bahl Paper Mills Ltd. [2018 (14) G.S.T.L. 306 (A.A.R. - GST)]

[2] Mohit Minerals Pvt. Ltd. vs. Union of India [2018 (10) GSTL 424 (Guj.); Ghanshyamlal & Co. [TS-345-HC-2019(GUJ)-NT]; Indorama Industries [TS-361-HC-2019(HP)-NT]

[3] Notification No. 6/2018-Integrated Tax (Rate) dated January 25, 2018

[4] Hotel Ashoka v. Assistant Commissioner of Commercial Taxes — 2012 (276) E.L.T. 433 (S.C.)

[5] IN RE: Rod Retail Pvt. Ltd. [2018 (12) GSTL 206 (AAR – GST)]

[6] A-1 Cuisines Pvt. Ltd. vs. Union of India [2019 (22) GSTL 326 (Bom.)]

[7] Vasu Consulting Pvt. Ltd. vs. Union of India [2019 (22) GSTL 163 (MP)].

[8] Atin Krishna vs. Union of India [2019 (25) GSTL 390 (All.)]

[9] Notification No. 11/2019 – Integrated Tax (Rate) dated June 29, 2019

[10] No.106/25/2019-GST dated June 29, 2019

[11] There is no double taxation with effect from January 25, 2018 in light of the specific exemption granted vide Notification No. 06/2018-I.T. (Rate) from payment of IGST under RCM for royalty and license fee - to the extent the same is included in the value of imported goods on which IGST (as a component of Customs duty) is paid. For the period prior to January 25, 2018, the issue of double taxation persists.

Originally published by GSTsutra Expert Column.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.