International travel is synonymous with duty-free shopping and other retail sales at the airports. The Covid-19 pandemic has redefined how, when and where we can travel. Even for those who are travelling overseas at these difficult and restrictive times, retail therapy is the last thing on their minds. Duty free & travel retail is a global industry that generated annual retail sales of US$ 86 billion in 2019 and covers the sale of goods to international travellers. Duty free shops are exempt from the payment of certain local or national taxes and duties, normally with the requirement that the goods are only sold to travellers who will take them out of the country.
Significant Source of Revenue
Duty free & travel retail generates vital revenues for national aviation, travel and tourism industries. Airports in particular increasingly rely on commercial revenues to fund the development of their infrastructure, and to help them keep the landing fees payable by airlines as low as possible. At airports across the world, retail is now the largest contributor to non-aeronautical income (second overall) and accounts for a third of total income for airports.
Chart Courtesy: Duty Free World Council
Who are we really benefitting by allowing the duty-free retail concept to function and flourish? People who travel international are generally rich or among the high earners. Should these people get the benefit of cheap liquor, cigarettes, chocolates and electronics? Aren’t these items among the goods that fall in the highest bracket of domestic taxes? The purpose of sin tax is defeated when unhealthy items are being diverted to lower or nil tax retail channel. If someone is looking for high-end noise-cancellation headphones, they should be paying justifiable rate of tax. As per an article published in ‘The Economist’, 20% of all perfume sales take place through duty-free shops.
The advocates for duty-free retail at airports argue that the revenue generated from sales at airports bring down the overall burden on the citizens and airports. While, the counter-view points out that the burden of a service should be borne by those using them. Governments across the world are losing vital revenue by allowing duty-free circus to continue. Duty-free sales started at Shannon Airport, Ireland in 1947. The reputation of Ireland as a tax haven is known across the world. Lately, countries in the middle east – especially UAE – have become the hub for such activities. Asia-Pacific region was the fastest growing region for duty-free sales before the pandemic halted all kinds of non-essential international travel.
Let us look at couple of scenarios: an Indian citizen purchases perfumes from Dubai and an Australian citizen picks up cigarette and premium alcohol from any of the airports in South-East Asia. Apart from the respective departure airports, none of the countries, where these items have been imported, stand to gain any tax revenue. It is an implied loss of revenue to the exchequer and that too from goods of the highest tax bracket.
Probably, the duty-free retail has been carried on since its inception without evaluating the cost and benefit in present circumstances. A relook will do no harm to anyone and we may get a clearer picture regarding the future viability of this system.