Ocean Freight is the logistics of exporting and importing cargo by shipping lines. Pricing of goods in case of imports are of different categories namely, CIF and FOB. CIF refers to shipping arrangement where the seller of the goods is responsible for the arrangement and payment of transportation up to the destination port. The seller is responsible for arrangement of insurance as well.
The taxability of Ocean Freight component has always been a matter of litigation under pre-GST regime. The problems and the conclusions drawn under the service tax regime have still not been resolved and same has been continued under the present taxation regime.
The intention of this article is to understand and identify upon whom the liability to pay GST vests when ocean freight is paid in case of CIF (Cost-Insurance-Freight) import.
During Service Tax Regime
Taxability of ocean freight under service tax has undergone repeated changes throughout its regime with different conclusions drawn from time to time and different interpretations of law.
Prior to 22nd January’2017
Ocean Freight was exempted from taxation in the aforementioned period under section 66D (Negative List):
“Services by way of transportation of goods-
- by an aircraft or a vessel from a place outside India upto the customs station of clearance in India”
The said entry under the Negative list was omitted with effect from 1-06-2016 and a pari materia provision was incorporated in the Mega Exemption Notification dated 20-6-2012 vide entry no. 53. Resultantly, the benefit of exemption on ocean freight on import of goods continued.
Post 22nd January’2017 till 1st July’ 2017
The entry in Mega Notification was removed and subsequent notifications were issued that imposed liability on foreign liner or steamer agent to pay service tax.
This amendment gave rise to practical issues that were brutally criticised by the industry. In line with the amendment cases where a foreign exporter hires a foreign shipper for transport of goods to India, the person liable to pay tax was “the person in charge of the vessel” or his authorised agent in India. This was a peculiar case where, neither the service provider or the service receiver was in India, however, in terms of such legal provisions, an agent having establishment in India was liable to pay service tax, being a third party, neither a service provider or a service recipient0..
This position was amended with effect from 13-4-2017. Notifications were issued making importer located in India fully liable to pay Service Tax in case of services provided by a person located in non-taxable territory by way of transportation of goods by a vessel. The Notification did not provide for differential treatment for imports on CIF or FOB basis. The point of taxation was the bill of lading. Since the importer was not aware of the value of Ocean Freight, he had an option to pay 1.4% of CIF value as Ocean Freight of such imported goods.
For the period between 22.1.2017 and 23.4.2017, the taxability shifted from one hand to another and the same can be summarised as follows:
|A||Prior to 22/1/2017||Not Taxable|
|B||22/1/2017 to 22/4/2017||Taxable at the hands of Foreign Liner or Steamer Agent|
|C||After 23/4/2017||Taxable at the hands of Importer|
Thus the last amendment in service tax regime suggested a matter of double taxation imposed on the importer. Once, custom duty was levied on the value of goods which included ocean freight. Secondly, service tax under RCM was levied on the importer for Ocean Freight.
The situation as existed on 30th June, 2017 continued under GST laws, requiring importer to pay IGST on freight element. Moreover, few Advance Ruling has been pronouced on this issues. Section 5(3) of the IGST Act, 2017 empowers the Government to specify certain goods or services that will be taxable under Reverse Charge basis. As per Entry no. 10 of Notification No. 10/2017- Integrated Tax (Rate) dated 28.06.2017, if any services are supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the custom station of clearance in India to a person in non-taxable territory, GST shall be payable by the importer as defined in clause (26) of Section 2 of the Customs Act, 1962 (52 of 1962) located in taxable territory.
As the importer is not party to the contract of transportation hence he will not be aware of the value of service. Notification No. 08/2017- Integrated Tax dated 28/07/2017 read along with corrigendum dated 30-07-2017 specifies that the value shall be 10% of CIF value.
Recent Advance Ruling by Uttarakhand State in the matter of M/s Bahl Paper Mills Limited ruled that an importer is required to pay IGST on CIF value of the imported goods.
As per Section 3(7) of the Customs Tairiff Act, 1975:
“[(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8)”
(8) For the purposes of calculating the integrated tax under sub-section (7) on any imported article where such tax is leviable at any percentage of its value, the value of the imported article shall, notwithstanding anything contained in section 14 of the Customs Act, 1962, be the aggregate of— (a) the value of the imported article determined under subsection (1) of section 14 of the Customs Act, 1962 or the tariff value of such article fixed under sub-section (2) of that section, as the case may be;”
In line with Section 15 of the CGST Act, 2017 that lays down particulars of Valuation under GST clearly mentions that incidental expenses to main supply shall form a part of Supply. The extract of which is coined below:
“The value of supply shall include—
c) Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods and services or both at the time of, or before delivery of goods or supply of services”
Conjoint reading of the above provisions suggests that freight shall be included in the value of imported goods and levy of same under the reverse charge mechanism makes it taxed twice.
Although, the Notification, Entry No. 10 vests the liability on the importer to pay IGST, it is noted that the said notification also stipulates that payment under RCM would be payable by the ‘recipient of the service’. On conjoint reading of Notification No. 10/2017- Integrated Tax (Rate) and Section 5 of the IGST Act, it is transparent that liability to pay GST under reverse charge would vest only in the recipient of service.
In the present scenario envisaged, where goods are transported on CIF import basis, it is the exporter located outside India who is liable to pay the shipping line for the service of transportation. Thus, it is foreign exporter who has in fact received the service and is the recipient of the supply of the shipping line as per the definition under GST. In such a scenario, the importer located in India is not the recipient of the supply and the liability to pay GST cannot be vested on him for the reason that the charging section and the Notification vest the IGST liability only on the recipient of the supply.
Therefore there is no legal standing to impose liability to pay tax on the importer leading to double taxation.
However, an alternative view to the above is that in accordance with the definition of ‘Recipient of supply’, Department can litigate that the importer is well within the purview of the definition.
“Recipient of supply of good or services or both, means-
- Where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration
- Where no consideration is payable for supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of goods is given or made available; and
- Where no consideration is payable for supply of service, the person to whom the service is rendered”
As per clause (a) of the definition, the importer can be brought within the ambit if the definition since the foreign exporter is charging the importer for the entire value of goods supplied. In other words, the amount of ocean freight is being reimbursed by the exporter from the importer. Thus, consideration is flowing for the supply of goods or services or both as is the case here.
In order to keep litigations at bay, one can resort to paying IGST on Ocean Freight notwithstanding the fact that this leads to double taxation and can claim credit consequently. The window for claiming credit for the FY 2017-2018 is now open till 31.03.2019.3
It can be inferred that although this transaction is leading to double taxation and GST law has not clearly and definitely ascertained as to who will be liable to pay tax in the present scenario, however, one in order to avoid future litigations, may explore payment under RCM and claiming the IGST paid as input tax credit.
1 Notification No. 2/2017- ST and Notification No. 3/2017-ST dated 12.01.2017
2 Notification No. 15/2017-ST and Notification No. 16/2017-ST dated 13.04.2017
3 Order No. 02/2018- Central Tax dated 31.12.2018
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