Taxability of Ocean Freight on Import under GST Regime

Mr. Satish S.
Partner, D Arvind & Associates LLP

Evolution of Indian Taxation system has been fraught with overlapping jurisdiction between centre & state and also centre & centre. After the advent of GST, the last issue a businessman can think of is “Double Taxation”. Yes, the Government claims to levy only one tax but still there is overlapping jurisdiction.

It could not get any better than this with the Indian Taxation System, as it is not a case involving a state levy and a Central Levy but a case of double taxation involving the same revenue collecting board – The All New CBIC. On a lighter note, this gives a reason why it is called as Central Board of Indirect Taxes and Customs when Customs duty itself is an Indirect Tax.

Of course, this is not a new found issue under GST but an unwanted legacy from the erstwhile Regime. Transportation of goods by sea was a taxable service leviable to Service Tax with effect from 01^st March 2016. Prior to that, it was outside the purview of Service Tax by virtue of an entry in the “negative list” contained in Section 66D of the Finance Act, 1994.

On 1st March 2016, by virtue of an amendment to Section 66D of the Finance Act, 1994, the government imposed Service Tax on ocean freight for both inbound and outbound shipments. For outbound shipments, tax was zero rated. On inbound shipments, Service Tax (including KKC & SBC) at the rate of 15% was levied on 30% of the freight amount. This is by virtue of the abatement added to Notification 26/2012 dt. 20^th June 2012 for arriving at taxable value of freight for the purpose of Service Tax.

Now, in the GST Regime, the service of transportation of goods by a vessel from a place outside India up to the customs station of Clearance in India (Import Ocean Freight) is taxable @ 5% (IGST) by virtue of Notification 8/2017 – IGST (Rate) dt. 28^th June 2017 read with the IGST Act, 2017 & relevant provisions of CGST Act, 2017.

Having understood the tax implications on “Ocean Import Freight” in the pre as well as the post GST Scenario, let us understand how this is being subject to Double Taxation in the GST Regime.

As per Rule 10(2) of the Customs (Determination of Value of Imported Goods) Rules, 2007, the value of any imported goods shall include the transportation of the imported goods up to the place of importation i.e. First Customs station in India. Further, the rule also provides an ad-hoc rate of 20% for determining the cost of such transportation, in case the cost of transportation is not ascertainable.

This results in the freight component getting added to the value of goods automatically and thus resulting in payment of Customs Duties (Basic Customs Duty, Cesses / Social Welfare Surcharge) & IGST on the freight component as well.

Therefore, the Freight Component on one hand suffers IGST @ 5% in the form of Import of Services either on Forward Charge / Reverse Charge and on the other hand suffers Customs Duties & even IGST in the guise of value of goods.

Now, if this is not a classic case of Double Taxation, what is it? A case where not only two central levies (Customs Duties & GST) but also the same tax (IGST) is levied twice on the same component, one as a service and another as goods. For the record, let us not, forget it is supposed to be “Goods & Services Tax”.

A much more interesting yet abdicable legacy from the Service Tax regime on the same lines is subjecting this service to levy of tax even when both the Service Provider & the Service Recipient are located in the non-taxable territory.

In the Service Tax Regime, it was by virtue of Notification 01/2017 effective from 22.01.2017 which removed the exemption bestowed on this transaction and made the Agent of the Shipping Line and later the importer liable to pay Service Tax on Prepaid Ocean Import Freight (i.e. on CIF / CFR Shipments) when the Service Provider (the Shipping Line) and the Service Recipient (Exporter of goods outside India) is located outside India.

Now, this has been transitioned into the GST Regime through Notification 8/2017 – IGST (Rate) dt. 28th June 2017 read with the Corrigendum issued dt. 30^th June 2017.

While we could see a provision to penalise an importer beyond the scope of the Customs Act in the recent Union Budget, there is no provision to tax a service which is entirely beyond the scope of the law under GST / the erstwhile Service Tax Regime.

Both the above mentioned legal discrepancies have to be brought before an appropriate court of law and the GST Council so that the same could be acted upon for the larger good of the business. Let us not forget that, after all these are indirect taxes which are ultimately borne by the common man and particularly in an era of borderless e-trade & commerce, this should be corrected immediately.

Such Positive amendments will promote “Make In India” Initiative and make India a more cost competitive destination. History should not repeat itself.

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Compiled by GSTstreet for #GSTManthan