General extension to the validity period of conditional Customs exemptions: A task well done?

Background  

Section 25 of the Customs Act, 1962 (‘Customs Act’) empowers the Central Government to grant exemptions from levy of Customs duties with or without corresponding conditions. Over the years, various exemptions were notified under the said provision, some of which had turned outdated or redundant in course of time but still formed part of the statute book.  

The task of overhauling old exemptions was announced in the Union Budget 2021-22, wherein the announcement to review and remove redundant notifications was made.  Sub-section (4A) to Section 25 was inserted to provide fixed expiry date for all conditional exemption notifications. As per the said provision, which became effective from 28.03.2021, unless otherwise specified, all conditional exemptions shall be valid only up to 31st March falling immediately after two years from the grant of exemption. For the conditional exemptions that existed at the time of enactment of such provision, it was provided that the period of two years shall be reckoned from 01.02.2021.  

In view of the above, various conditional exemption notifications granted before March 2021 were set to have limited validity up to 31.03.2023 (i.e., 31st March falling immediately after years from 01.02.2021). It may be noted that the TRU letter dated 01.02.2022 issued with the Finance Bill, 2022 mentioned that the provisions of Section 25(4A) of the Customs Act would not apply to exemptions granted pursuant to trade agreements or FTP. However, legislative backing to such clarification was absent which has now been dealt with in the Finance Bill, 2023.   

Proposal in the Finance Bill, 2023 

Clause 123 of the Finance Bill, 2023 has proposed to insert a proviso to Section 25(4A) of the Customs Act to the effect that the provisions as regards limited validity period of conditional exemption notification shall not apply in specified cases. The exception list provided in this proposed proviso covers the exemptions granted to or in relation to the following: 

1. Any multilateral or bilateral trade agreements 
2. Obligations under international agreements, treaties, etc. or such other obligations including with respect to UN agencies, diplomats and international organisations 
3. Privileges of Constitutional authorities 
4. Schemes under the Foreign Trade Policy (FTP) 
5. Schemes of the Central Government having validity of more than two years 
6. Re-imports, Temporary imports 
7. Goods imported as gift or personal baggage 
8. Any duty of Customs under any law in force, including IGST but other than Customs duties specified under Section 12 such as Basic Customs Duty (BCD) 
 

In the absence of any specific effective date, the said provision may become effective from enactment of the Finance Bill, 2023 as an Act.  

Analysis of the proposed proviso and potential interpretational issues 

In order to save various conditional exemptions granted before March 2021, either a specific or general extension was required. Clause 123 of the Finance Bill, 2023 seeks to achieve this by creating an exception list of conditional exemptions, which would remain in force without any validity period unless specifically revoked or varied.  

However, in doing this, several practical difficulties and interpretational issues may arise. At the outset, various conditional exemption notifications pertaining to trade agreements, FTP, etc. will cease to be effective from 31.03.2023 in terms of Section 25(4A). Therefore, if the provisions of Finance Bill, 2023 are not enacted by that time, need to issue extension for each of such notifications may arise and in the absence of such extension, the benefits may not be available. 

Even after the overhaul exercise undertaken in 2021, the number of effective conditional exemption notifications is huge and the same pertain to a wide variety of subjects. Of the same, identifying the notifications that may fit within the language of exceptions specified above may turn out to be a daunting task. To illustrate, the exception clause (b) mentioned in the list above refers to “such other obligations” with respect to “international organizations”. The language is thus very open ended and subject to interpretational issues. While the Notification no. 50/2017 – Customs provides a definition of “international organization” with respect to specific entries (such as Entry no. 212A), no such definition or meaning has been provided under the proposed proviso. 

It is being observed that even while some conditional exemptions may be covered within scope of exception entries specified, a specific extension for the same has been provided in the current Budget. To illustrate, exemption provided vide Notification no. 153/1994 – Customs as regards exemption to goods of foreign origin imported for repair and return, etc. may very well qualify to be in respect of temporary imports. However, a specific extension up to 31.03.2024 has been provided to the said notification. Such selective specific extensions may potentially give rise to interpretational issues as regards validity of such exemptions beyond the specific extension provided. 

There are several conditional exemption entries under the Notification no. 50/2017 – Customs providing exemption from BCD as well as IGST. As per the proposed proviso, while exemption from BCD may expire automatically, exemption from IGST may still continue. This may lead to inconsistency and confusion.  

Conclusion 

In view of the above analysis, it appears that the proposed proviso to Section 25(4A) may lead to several interpretational issues. While some approach to achieve specific or general extension to all legacy conditional exemption notifications was required, the path walked upon in the Finance Bill, 2023 may not turn out to be a flat one.  

Harsh Shah is a Partner and Ruchita Shah is a Principal Associate at Economic Laws Practice. Views are personal