Summary: The Goods and Services Tax (GST) framework, effective from July 1, 2017, has undergone numerous amendments, particularly regarding the treatment of inbound and outbound freight. As of October 1, 2023, the Finance Act has clarified that inbound sea freight is subject to a 5% GST under the Reverse Charge Mechanism (RCM), while inbound air freight remains exempt from GST. This differentiation has raised questions among stakeholders about the rationale behind the differing tax treatments based on the mode of transport. For instance, in a case where machinery is imported by sea, the service recipient in India pays 5% GST on the freight charges, whereas if the same service is provided via air, no GST is levied. This discrepancy has led to inquiries directed at the GST department for a clearer understanding of the underlying principles guiding this distinction. The ongoing debate continues to evoke varied opinions among GST experts, especially since both air and sea freight are essential components of international trade.
We all know that Goods and Service Tax (GST) came into effect from 1st July 2017. After the enforcement of the GST numbers of the Amendments have been made according to the needs. GST on Outbound freight (i.e. GST on Export Freight) and Inbound Freight (GST on Import Freight) has been debatable. We do not want to discuss what provisions were earlier in the GST relating to applicability of Outbound freight and Inbound freight before 1st October 2023 and also the cases decided by the Hon’ble High Court of Gujarat as well as Hon’ble Supreme Court of Inia in Mohit Mineral and the Hon’ble Supreme Court of India upheld the same decision and also by Maharashtra High Court (Bombay High Court) in the case of Agarwal Coal Corporation Pvt, Ltd. because, nothing will be available on hand digging the grave except dead body. I want to discuss the present provisions relating to Outbound freight and Inbound freight. As under:
The Finance Act,2023 has with effect from 1st October 2023 amended the definition of the place of supply and place of receipt.
Location of service provider and recipient are in India
From 1st October 2023 onwards, even for outbound freight, place of supply shall be the location of the recipient of service (assuming service recipient is registered under the GST provisions). Therefore, CGST and SGST would be applicable if the service provider and the service recipient are in the same state, and IGST would be applicable if they are in the different states,
Location of service provider or the service recipient is outside India
From 1st October 2023 onwards, place of supply in such cases shall be the location of the recipient of services. So, in case of both inbound and outbound freight (except inbound air freight),
i) if the service provider is in India and the service recipient is located outside India -it will be considered as an export of service and will be zero rated if other conditions related to export of service are satisfied.
ii) if the service provider is located outside India and service recipient is in India, the service (except air inbound freight) will be considered as import of service and GST under reverse charge would be applicable.
Inbound air freight, being an exempted service, shall continue to be exempted under both the cases.
In case, both the service provider and service recipient are located outside India, in terms of Supreme Court’s judgement in the case of Mohit Minerals and recently issued notifications, ocean freight is not chargeable to GST in India.
As per above ii) where the service provider is out of India and service recipient is in India (except air inbound freight) will be considered as import of service and GST under reverse charge would be applicable. If we talk here for inbound sea freight and try to understand ii) above, then we can understand as under:
Case Study No.1
Mr. A of Ahmedabad imports some Machinery from Germany on Incoterms Free On Board (FOB) Hamburg Sea port Germany. In this transaction the Machinery will be shipped in the 40ft long container with discharge Port as Mundra Port India. Mr. A book the container of ABC shipping line in Germany from India through freight forwarder in India. Mr. A inform the Machinery supplier to pick up the empty 40ft container from ABC shipping line for stuffing the Machinery in the container and arrange to load the Container onto the connecting vessel after getting the Machinery cleared from the Customs Hamburg Sea Port. As the Incoterms is FOB the supplier of the Machinery is responsible to bear the expenses upto loading of the Customs cleared Machinery (in Container) on to the ship. Mr. A is responsible for Sea freight and Insurance charges from Hamburg Sea Port to Mundra Sea Port.
Mr. A who, is in India, has received service in India for transporting Machinery in Container from Hamburg Sea Port to Mundra Port India from ABC Shipping Germany so, Mr. A is recipient of services in India and ABC Shipping is service provider located in Germany Outside India. Hence the place of supply of services is in India because as defined above the place of recipient of service shall be considered as the place of receipt of the service. Mr. A will pay Sea Freight and Insurance charges, if Mr. A wants insurance coverage, from India as German supplier of the Machinery will bear cost of the machinery and expense up to loading of the container on to the connecting vessel for Mundra Port India.
In this case 5% GST will be applicable on the Sea freight amount because the recipient of the service of sea freight is Mr. A who is in India and the place of the receipt of service shall be considered to be in India because the service provider ABC Shipping line is in Germany but the recipient of service is in India so place of receipt of service shall be considered in India so the freight service will be subject to 5% GST but on Reverse Charge Mechanism (RCM) basis.
We saw the above is GST chargeability on Inbound Sea Freight on Incoterms FOB but what will be the position of GST chargeability if Incoterm is different like from FOB free On Board to CIF Cost Insurance and Freight.
We try to understand by using the above said example with modification of Incoterm as CIF from FOB as under:
Case Study No.2
Mr. A of Ahmedabad imports some Machinery from Germany on Incoterms CIF Mundra Sea Port basis. In this transaction, the Machinery will be shipped in the 40ft long container with discharge Port as Mundra Sea Port India. The German supplier of the Machinery will arrange the container from ABC Shipping line in Germany for Mundra Port India. He books the container through his forwarder in Germany with ABC shipping line in Germany stuff the Machinery in the 40ft Container get Customs Cleared the Machinery from Hamburg Sea Port Customs and load the Container onto the connecting vessel for Mundra Sea Port India.
As the Incoterms is CIF the supplier of the Machinery is responsible to bear all the expenses like cost of the machinery, Sea freight and Insurance of the shipment from the port of loading ie Hamburg Sea Port to Mundra Sea Port India. Mr. A , buyer will make payment against the Invoice raised by the supplier of the consolidated amount which includes machinery cost, sea freight and insurance which is called the invoice value as CIF Mundra Sea Port India.
In case of the Import on CIF basis the service recipient is supplier of the Machinery who is out of India. Further, he books the container with ABC shipping line located in Germany through his forwarder and get the container for stuffing the Machinery for export to Mr. A of India so place of receipt is also outside India. Moreover, as the value of the Machinery which is to be imported is consolidated (cost of machinery, sea freight and insurance) so Mr. A is not able to know amount of the sea freight paid by the supplier.
Case Study No.3
Before going further in this case study No.3 let’s we understand the meaning of Incoterm Ex Work in the International Trade. Ex works can be of two types one is Ex work at Factory/warehouse and other is Ex work at Port which may be Sea Port or Airport. If any export or import transaction is on Ex work at factory basis which means the exporter/supplier / seller will deliver the goods at the gate of his factory. After delivery of the goods is Ex work at factory all the responsibilities and expenses including Customs clearance at the Port of loading till Port of discharge ie Port where the goods will arrive as Imported goods and Customs cleared in the Importing Country will be of Importer/Buyer.
The forwarding agent so appointed by the buyer will if he is having his branch office in the country of the seller will arrange booking of container or vessel or Airline as the case may be and picking up the goods. After completing all the formalities or if the forwarding agent does not have his office in the country of the seller, then he will arrange to appoint other forwarding agent having office in the country of the seller and arrange to get the job allotted by the buyer completed.
The buyer will pay to the forwarding agent so appointed by him as per their agreed term for all the services provided by the forwarding agent from picking up of the goods on Ex work basis from the place as fixed by the seller in the seller’s country to the Port of discharge as fixed by the buyer including Sea or Air freight.
Now for better understanding we try to understand the Import transaction on the Ex-work through example. Mr. A of Ahmedabad imports some Machinery from Germany on Inco terms Ex Works factory gate basis. Mr. A appoints Shark Logistics of Ahmedabad to pick up the machinery from the factory gate of the Machinery supplier and to bring the Machinery by Sea at Mundra Sea Port India. Mr. A arrange requisite insurance coverage from the Factory gate of the Machinery supplier in Germany to Mundra Sea Port India. Shark Logistics arranged container to stuff and pick up the Machinery transport the Machinery stuffed in the container to Hamburg Sea Port from the supplier’s factory, completed all formalities of Hamburg Sea Port Customs and get the Machinery Customs cleared at Hamburg Sea Port and loads the container on to the connecting vessel.
On arrival of the Machinery loaded container at Mundra Sea Port India, Mr. A will pay all the charges from picking up of the Machinery loaded container from the supplier’s factory to Hamburg Sea Port, Customs clearance charges, Shipping line and CFS charges as may be applicable at the Hamburg Sea Port Germany, Sea Freight from Hamburg Sea Port Germany to Mundra Sea Port India to Shark Logistics and take delivery order for taking delivery of the Machinery get Customs cleared at the Mundra Sea Port India.
In such type of the Import transaction the service recipient and place of service both are in India.
Since enforcement of the GST ie from 1st July 2017, applicability of GST on the Outbound Freight (Export freight and Inbound freight (Import freight ) had become debatable that whether GST should be applicable or not and finally it was decided that GST @5% of the Sea freight will be chargeable on Outbound Sea freight ( Export Sea Freight) and 18% (9% GST + 9% CST) as per general provision of GST will be applicable on Outbound (Export Air freight).If the exporter exports by Sea on any of the Incoterms like CIF,CNF , DAP ,DDP,DDU, ( these are the Incoterms in which the exporter is a recipient of the export freight services and place of services is in India because the exporter is in India). No doubt that in case of export on DAP, DDP, DDU GST will be applicable on the services received in the country of export (Foreign country) by the exporter based in India through the Agent or Freight forwarder appointed by him considering that the service recipient (exporter) is in India and the place of receipt of the services is in India because the service recipient (exporter) is in India. Notwithstanding that the services are provided in the country of export ie foreign country. (Here below I have mentioned meaning of the Incoterm in brief so that idea of services covered under the above said incoterm can be understood easily)
Similarly, if any Import is made on any of the above said incoterms like DAP, DDP, DDU the services received in the country of export (Foreign country) by the exporter based in any country outside India through the Agent or Freight forwarder appointed by him for providing services in India the services will be exempted in the similar way as the service receiver (exporter) is outside India and place of service (country of export) is also outside India.
Now, as we have seen above that Inbound Sea freight (Import Sea Freight) is subject to 5% GST on RCM basis, except the import is on CIF basis, as per the case decided by the Hon’ble Supreme Court of India in the case of Mohit Mineral. But as per the Notification of 2023, Inbound Air freight (Import Air freight) is exempted from the applicability of GST,
Now the point for discussion is that why Inbound Air freight (Import Air freight) is exempt from the applicability of GST and Import Sea freight, except import on CIF basis, is still chargeable with 5% GST. Is it because of change of type of vehicle, ship and aircraft or because of change of way of carrying the imported goods sea and air !!! the logic behind this is not understandable. All parameter between import by Sea and by Air are the same except the vehicle the how come the applicability of GST is different like GST applicable on Import Sea freight and GST is exempt on Import Air freight.
I have requested by email to the GST department of the Central Board of Indirect Taxes and Customs to give logic behind non-applicability of GST on Inbound Air frieight but still not receive any reply from them.
I widely invite view of the GST expert on this Article, but view should be logical.
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