IGST on Ocean Freight Unconstitutional/Double Taxation
Case Covered: MOHIT MINERALS PVT LTD v. UNION OF INDIA (SCA No. 726 of 2018), Gujarat High Court
Introduction:
According to Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017, services provided by a person located in non-taxable territory to a person also located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India will be taxable at the rate of 5%. Thus, ocean freight will be taxable at the rate of 5%.
The Central Government, thereafter, issued the Notification No.10 of 2017– Integrated Tax (Rate) dated 28th June 2017, by which the Central Government has notified that for the said category of service provided at Serial No.10 to the said Notification, the importer as defined in clause 2(26) of the Customs Act located in the taxable territory shall be the recipient of service.
Brief facts of the case:
IGST is levied on any supply of goods and/or services in cases of import into the country. Under the GST, CORRIGENDUM dated 30.06.2017 to Notification No. 8/2017 -Integrated Tax (Rate), dated the 28th June, 2017. Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods, However, at the same time, customs duty on the CIF value (which includes the component of freight as well) of the goods imported into India is also paid by the importer. As a result, there is double-taxation on the component of ocean freight under GST law which is an impediment and has bloated the cost of imports.
Submission on behalf of Writ Applicant
Writ petition filed before high court based following elements:
1. Petitioner having paid the tax under IGST Act on the entire value of imports (inclusive of components of ocean freight), the petitioner cannot be asked to pay again tax on the ocean freight all over again under a different notification.
2. In case of Cost, Insurance and Freight (CIF) contracts, both the service provider and the service recipient are outside the territory of India. No tax on such services can be collected even on under reverse charge mechanism (RCM).
3. In case of High Sea sales, the burden is on the petitioner as an importer, whereas, the petitioner is not the recipient of the service at all. It is the petitioner’s seller of goods on high sea basis who has received the services from the exporter/ transporter.
Submission on behalf of Revenue:
1. it is submitted that in the ‘transport of goods’ which is carried out by a person other than the importer himself is an activity which gives rise to the aspect of providing transportation services of the said imported goods and as such gives rise to a taxing incident distinct from the tax on import of goods.
2. There are two separate taxable events. The levy under the notification draws power from the charging section of the Act. In the present case, the levy on the transportation services received by the importer under the impugned notification draws power under Section 5 of the IGST Act, 2017, and that the levy on the import of goods is a separate taxable event, the levy of which is under Section 3(7) of the Customs Tariff Act, 1975.
3. Further, there is no violation of Article 14 or Article 19(1)(g) of the Constitution of India inasmuch as the importers are free to carry on their trade. This levy is on all importers and does not interfere with the right of the importers to practice any profession, or to carry on any occupation, trade or business.
Decision by Hon’ble High Court:
1. The Hon’ble High Court concluded that no tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in
2. In the result, this writ-application along with all other connected writ-applications is allowed. The impugned Notification No.8/2017 – Integrated Tax (Rate) dated 28th June 2017 and the Entry 10 of the Notification No.10/2017 – Integrated Tax (Rate) dated 28th June 2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency. Both the Notifications are hereby declared to be unconstitutional. Civil Application, if any, stands disposed of.
Conclusion:
Hon’ble Court held that Entry 10 of the Notification No.10/2017– Integrated Tax (Rate) seeking to impose IGST on the ocean freight on the importer in the case of CIF contracts is ultra vires the provisions of the Act. Therefore the same is struck down as it lacks legislative competency. Indian importer now no longer required to discharge tax under the RCM on the deemed value pertaining to the ocean freight. It is quite possible that department may file an appeal before the Hon’ble Supreme Court. It is big relief for those importers who have large pools of Input Tax Credit due to different reasons, including exempted supplies, would end up saving substantial tax accumulations. Those taxpayers who already paid IGST under RCM on Ocean freight and availed Input Tax Credit on the same have no remedy but those taxpayers who have not availed Input tax credit due to exempted supplies or other reason etc. can file their refund applications.
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