Changes in GST notified: No IGST on Ocean Freight in CIF Contracts

Changes in GST: No IGST on Ocean Freight in CIF Contracts

In a significant development in GST regulations, recent changes have clarified the taxation of ocean freight in CIF (Cost Insurance Freight) contracts. These changes address the long-standing issue of potential double taxation and provide clarity on the levy of Integrated Goods and Services Tax (IGST) on ocean freight in the CIF contracts. This article explores the background, legal challenges, Supreme Court rulings, and the recent amendments that put an end to the dispute surrounding the taxation of ocean freight.

Background:

Earlier, Sl. No. 9(ii) of Notification No. 8/2017-Integrated Tax (Rate) dated June 28, 2017 (“the IGST Service Rate Notification”) provided that on the inter-state supply of services of “Transport of goods in a vessel including services provided or agreed to be 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” was leviable to Integrated Tax @5%.

Further, SI. No. 10 of Notification No. 10/2017-Integrated Tax (rate) dated June 28, 2017 (“the Reverse Charge Service Notification”) states that services supplied by a person located in non-taxable territory to a person located in non-taxable territory of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, is taxable under reverse charge basis.

Accordingly, the importer was liable to pay IGST on ocean freight paid on imported goods under the reverse charge mechanism (“RCM”) in terms of the Reverse Charge Service Notification and the IGST Service Rate Notification irrespective of the fact that ocean freight component having been part of CIF value of imported goods, on which Customs Duty including IGST was leviable.

The moot question, which was a matter of litigation viz., the importer was liable to pay GST twice firstly at the time of import of goods in India and secondly paying IGST under RCM on ocean freight component as per the abovementioned notifications. This leads to double taxation in the hands of the importer on the same component of ocean freight.

This issue was debated and litigated in the past and had divergent rulings.

This aspect was challenged before the Gujarat High Court in Mohit Minerals Pvt. Ltd. & Ors. v. Union of India & Ors. [C/SCA/726/2018 dated January 23, 2020] wherein the High Court in a batch of petitions has declared the Sl. No. 9(ii) of the IGST Service Rate Notification and SI. No. 10 of the Reverse Charge Service Notification as ultra vires to the IGST Act, as the notifications lack legislative competence.

However, the Revenue Department challenged the decision of the Hon’ble Gujarat High Court before the Hon’ble Supreme Court.

The Hon’ble Supreme Court, in the case of Union of India v Mohit Minerals Pvt. Ltd. [2022 (61) G.STL 25 (SC)], held that:

Held favourable on the following aspects:

• The Importer of goods will be considered the recipient as he is the ultimate beneficiary even though the shipping service is provided by the foreign shipping line to the foreign exporter in the CIF contract.
• The supply of services provided by the foreign shipping line to the foreign exporter in a CIF contract, would necessarily be “made” to the Indian importer who would then be considered a “recipient” under the definition of Section 2(93)(c) of the CGST Act.
• With regard to the validity of the said entry of the Reverse Charge Service Notification it was held that it clearly specifies a taxable person who is liable to pay a reverse charge that is envisaged in the statute. Thus, the impugned notifications in the case cannot be invalidated for an alleged failure to identify a taxable person.

Held in favour of the Taxpayers and concluded that:

• The assessee is liable to pay IGST on the ‘composite supply’, comprising the supply of goods and supply of services of transportation, insurance, etc., in a CIF contract. If there is a separate levy on the assessee for the supply of services’ by the shipping line, then, it would be in violation of Section 8 of the CGST Act and would amount to double taxation.
• Hence, there cannot be a separate levy of IGST on the component of ocean freight paid by the foreign exporter to the foreign shipping line in the CIF contract.

Therefore, in order to end the dispute on taxation on ocean freight in the CIF contract, the CBIC vide Notification Nos. 11/2023, 12/2023, 13/2023-Integrated Tax (Rate), all dated September 26, 2023 made the following changes:

Notifications

The CBIC vide Notification No. 11/2023-Integrated Tax (Rate) dated September 26, 2023 omitted the words “including services provided or agreed to be 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.” from Sl no. 9(ii) of the IGST Service Rate Notification.

The IGST Service Rate Notification Rates for supply of services under the IGST Act
SI. No.	Before Notification No. 11/2023-Integrated Tax (Rate) dated September 26, 2023	After Notification No. 11/2023-Integrated Tax (Rate) dated September 26, 2023
9	Transport of goods in a vessel including services provided or agreed to be 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.	Transport of goods in a vessel including services provided or agreed to be 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.

To Give Effect:

Proviso to Section 12(8) of the IGST Act is being omitted with effect from October 01, 2023 so as to specify the place of supply of services by way of transportation of goods to a registered person, to be the location of recipient, and in other cases the location at which goods are handed over for their transportation, irrespective of destination of the goods, in cases where the supplier of services and recipient of services are located in India.

The notification makes the consequential change in the IGST Service Rate Notification, removing ocean freight on the import of goods from reverse charge.

Further, the CBIC vide Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023, substituted the proviso of Sl. No. 10 of the Notification No. 9/2017-Integrated Tax (Rate) dated June 28, 2017 (“the IGST Service Exemption Notification”):

The IGST Service Exemption Notification Exemptions on supply of services under the IGST Act
Sl. No.	Before Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023	After Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023
10.	Services received from a provider of service located in a non- taxable territory by – (a) the Central Government, State Government, Union territory, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession (b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or (ba) way of supply of online educational journals or periodicals to an educational institution other than an institution providing services by way of (i) pre-school education and education up to higher secondary school or equivalent; or (ii) education as a part of an approved vocational education course (c) a person located in a non-taxable territory: Provided that the exemption shall not apply to (i) online information and database access or retrieval services received by persons specified in entry (a) or entry (b); or (ii) services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India received by persons specified in the entry.	Services received from a provider of service located in a non- taxable territory by – (a) the Central Government, State Government, Union territory, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession (b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or (ba) way of supply of online educational journals or periodicals to an educational institution other than an institution providing services by way of (i) pre-school education and education up to higher secondary school or equivalent; or (ii) education as a part of an approved vocational education course (c) a person located in a non-taxable territory: Provided that the exemption shall not apply to (i) online information and database access or retrieval services received by persons specified in entry (a) or entry (b); or (ii) services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India received by persons specified in the entry. Provided that the exemption shall not apply to online information and database access or retrieval services received by persons specified in item (a) or item (b).

To give Effect:

Earlier, the IGST Service Exemption Notification specially carved out the services of “services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India” from the exemption.

Now, the CBIC vide the Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023 removed the restriction as stated in the IGST Service Exemption Notification. However, this does not tantamount to exemption of such services.

Furthermore, the CBIC vide Notification 13/2023-Integrated Tax (Rate) dated September 26, 2023, omitted Sl. No. 10 of the Reverse Charge Service Notification which was earlier read as follows:

The Reverse Charge Service Notification Categories of services on which Integrated Tax will be payable under RCM under the IGST Act
SI. No	Category of Supply of Services	Supplier of the services	Recipient of Service
10.	Services supplied by 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.	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory.

To give Effect:

The stated omission of the said entry will remove the burden from the importer of payment of IGST on ocean freight services.

The Hon’ble Supreme Court in Mohit Minerals’ case held that since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF (Cost Insurance Freight) contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of the concept of ‘composite supply’. Such levy, in substance, was a tax on transactions between two foreign parties taking place outside India which apparently is beyond the territorial jurisdiction of the Indian Government.

As a consequence of this judgment, the provisions relating to reverse charge on ocean freight have now been omitted by the Government from the above IGST notifications w.e.f. October 01, 2023.

All the above Notifications shall be effective from October 01, 2023.

For Official Notification 11/2023-Integrated Tax (Rate): Amendment to Implement 50th GST Council Decisions (Notification No. 11/2023)

For Official Notification 12/2023-Integrated Tax (Rate): Amendment Implementing 50th GST Council Decisions (Notification No. 12/2023)

For Official Notification 13/2023-Integrated Tax (Rate): Amendment for 50th GST Council Decisions (Notification No. 13/2023)

Conclusion: 

The recent changes in GST regulations regarding ocean freight in CIF contracts mark a crucial milestone in resolving a contentious issue that has plagued importers for years. With the Supreme Court’s ruling and the subsequent amendments by the CBIC, the taxation of ocean freight is now clearer and more aligned with the principles of GST law. Importers can now conduct their business with greater certainty and reduced tax liabilities, promoting ease of doing business in India.

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 (Author can be reached at info@a2ztaxcorp.com)