The first Formula1 Grand Prix slated for end October seems to be in trouble. The customs department has asked the organisers, Jaypee Sports India to pay 100 percent duty upfront on all equipment coming into the country for the race.

While no valuation has ever been done on Formula 1 equipment, it is estimated that the duty on them could be around Rs. 600 crore or more, reports TOI. The amount would be returned once the event is over and the equipment is taken back after a deduction of 2 percent.

The organisers say that arranging for that kind of money on such a short notice when they have to dedicate their energies to the culmination of a successful event is very tough, according to media reports.

The organisers have been persuading the government to adopt international practice followed in other countries where a ‘custom bonded area’ is declared for the track. This would enable the teams to fly-in their equipment into the country and directly take it to the circuit and return it via same channel, thus eliminating the need to pay customs.

 
The government, however, has categorized Formula 1 as entertainment and not sport. It seems that the organizers might end up paying the entire duty to allow the equipment to come into the country.

Bar & Bench spoke to Economic Laws Practice Partner Tarun Gulati on this issue.

Bar & Bench: The customs department has asked the organisers to pay 100 percent duty for bringing racing equipment into India. The government has said that the amount would be returned once the event is over and the equipment is taken back after a nominal deduction of 2 percent. Your views on this.

Tarun Gulati: There are certain sports activities that are recognized for which specified sports goods, equipments and requisites required for training purposes etc is exempted under an exemption notification. However, this activity is not being considered as sport. Various sports like archery, basket ball, athletics, badminton, boxing, cycling etc are all covered in the exemption Notification No. 146/94. The Notification has been amended from time to time to expand the scope of the notification to include various sports.

Separately, there are some exemption notifications for temporary imports of scientific equipments, educational equipments etc. If the Government wants they can issue an exemption under such notifications.

The third alternative is warehousing provisions which can be utilised as requested by the organisers in this case. There are provisions for granting licences to private warehouses under Section 58 of the Customs Act. In such a situation what happens is that when an area is licensed as a private warehouse, then when goods enter the borders of the country, you file a bill of entry for warehousing, and then goods go under a bond to the private warehouse. Since a bill of entry for home consumption to clear the goods for consumption in India is not being filed, there is no duty impact. The provision for paying the duty is therefore not attracted. In a case like this, the area where the race is going to happen can be declared as private bonded warehouse, and then from the airport to this area the goods will move under a bond. The person who is licensed will give an undertaking that he will use the goods in the private bonded warehouse and when the use is over, the person will re-export the goods. This is something very procedural in nature and should not be a problem for the government to do.

If nothing is offered, then the last alternative is to pay full duty and then when the goods are taken back you get a duty drawback which is clearly provided under the Customs Act. If you send the goods back within 6 months, you get 98 percent of the duty back as a refund. The only issue is that it is a huge cash flow issue and of course you lose 2 percent of the duty. It will create procedural hassles for this activity which is not a done thing. World over benefits are granted to facilitate these activities. There is no reason why it shouldn’t be done in India as well. When you had other sports events like ICC World Cup, Commonwealth Games, these kind of issues didn’t arise because government cooperates and gives certain benefits. Obviously because this is being organised by private entities and this is seen more as entertainment for the elite, benefits are not being granted.

There are various options if the government wants to facilitate this activity.