GST on Freight in case of Imports on CIF basis- impact of recent notifications
This article summarises the recent notifications issued by the Finance Ministry to exempt GST under reverse charge on ocean freight in case of imports on CIF (Cost, insurance, and freight) basis, consequent to the decision of the Supreme Court in the case of Mohit Minerals.
Background
In case of import on CIF basis, freight is directly paid by the overseas exporter. Since, the transport service provider and the recipient both are located outside India, such service, in an ideal scenario, should not be taxable. Similarly, in case of CIF imports, since the importer is not a service recipient (of the transport service), in an ideal scenario, he is not supposed to pay GST on freight.
However, Sr. No. 109(c) of Notification No. 9/2017-Integrated Tax (Rate) dated June 28, 2017 which, in general, exempted service provided by a person in non-taxable territory to non-taxable territory, specifically excluded inbound ocean freight from this exemption. Therefore, in case of inbound ocean freight, service provided by a person located outside India to a person located outside India was liable to GST. Since, it is not possible to levy and recover tax on overseas service providers, in such cases, an importer was made liable to pay GST under Reverse Charge Mechanism (RCM), as per entry 10 of Notification No. 10/2017 – IGST (Rate). Therefore, in case of import on CIF basis, an importer was required to pay GST under RCM on 10% of CIF value of the goods imported (deemed value of service).
Mohit Minerals Case
In the case of Union of India Vs Mohit Minerals Private Limited, the Apex Court had held that the import of goods on CIF basis is a composite supply of goods (including transportation service) on which IGST was already paid. The SC had accordingly quashed the separate levy of IGST on freight in case of imports on CIF basis.
Amendments in GST laws
The Government, consequent to the SC’s judgement, in order to align the GST laws with the judgement, has recently issued 3 notifications, which are effective from 1st October 2023:-
1. Notification No. 11/2023- Integrated Tax (Rate) Dated: 26th September, 2023– removed inbound ocean freight services provided by a person in non-taxable territory to non-taxable territory from the relevant entry under IGST rate notification.
2. Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023– removed the exclusion of inbound ocean freight from the exemption provided for services by a person in non-taxable territory to a person in non-taxable territory.
3. Notification 13/2023-Integrated Tax (Rate) dated September 26, 2023– removed the entry related to liability of importer under RCM in such cases.
Effectively, the above notifications confirm the non-applicability of the inbound ocean freight from the applicability of GST, in case of imports on CIF basis.
(Information in this article is intended to provide only general information of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions. Author can be reached at mra@manishragarwal.in)
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