Ocean/sea freight is a method of transporting large quantities of a product via cargo ships; goods are packed into containers and these containers are loaded onto a vessel, where they will be sailed to their destination country.
Almost 90% of everything we buy in today’s world arrives through ocean freight. Containers are the blood cells of world’s economy, and the idea of “globalization” would not even exist without the product flow created by containers. Obviously, shipping costs are an essential part of our purchases. Either directly or indirectly, we are all paying to move these metal boxes around the world. Every item manufactured overseas has a logistics expense hidden in its selling price. We simply cannot avoid paying for shipping, unless we start manufacturing smart phones in our backyards.
With the onset of GST it’s especially important to examine the impact of GST on the Indian shipping lines which bring a major share of revenue to the Indian economy.
CIF vs. FOB SHIPPING AGREEMENTS
Cost, Insurance, and Freight (CIF) and Free on Board (FOB) are international shipping agreements used in the transportation of goods between a buyer and a seller. They are among the most common of the 12 international commerce terms established by the International Chamber of Commerce (ICC) in 1936.
The specific definitions vary somewhat in every country, but, in general, both contracts specify origin and destination information that is used to determine where liability officially begins and ends, and outline the responsibilities of buyers to sellers, as well as sellers to buyers.
Difference between CIF and FOB transactions
|BASIS OF DIFFERNECE||CIF||FOB|
|Cost of Freight and Insurances||The seller pays the cost and freight necessary to bring the goods to port of destination but the buyer has to bear the risk of loss and additional cost occurring after delivery at the port of destination.||The buyer bears all cost related to imported goods from the point after the goods have been loaded by the exporter –technically” passed the ship’s rail”. The major cost involved after the goods are loaded into the vessel is the cost of freight upto the import port.|
|Risk||Exporter procure insurance for buyer’s risks of loss upto named port of destination however exporter risks is limited only upto point of cargo loading at named port of departure. Buyer must take appropriate risks mitigation measures to protect himself as insurance procured by exporter is minimum cover unless otherwise agreed.||Risks shift from exporter to importer when goods are loaded on ship appointed by importer at port of departure. Proof of loading is mate’s receipt.|
|Best use||Ideal for containerized cargo or port to port shipment.||Most suitable for both the parties in ideally competitive situation. It gives the buyer the control on supply chain. Establishes ideal business relationships as both the importer and exporter deals with their respective countries rules and regulations more effectively.|
Import of Goods –GST on Ocean freight
Let us look into the taxation of the Ocean Freight services in the erstwhile Service Tax regime and GST regime
Prior to 1.6.2016 the services of transportation of goods in a vessel from a place outside India upto the customs station of clearance in India was exempted from service tax. As a result, the Indian shipping lines were unable to avail input tax credit paid on the input goods and services and such tax formed a part of their transportation costs. Similarly even outward transportation of the goods by Indian Shipping lines was zero rated under service tax. As a result, the Indian shipping lines were able to avail input tax credit paid on the input goods and services used for zero rated supplies but could not utilize them. So they were rendered uncompetitive vis-a-vis foreign shipping line. In view of the requests from the Indian Shipping Industries and other stakeholders, to provide them the level playing field vis-a-vis the foreign shipping lines, service tax was imposed on the service of inward transportation of goods to enable the Indian shipping lines to use the ITC available with them against Output Service tax payable on Inward transportation of Goods.
However upon introduction of service tax on services of domestic shipping lines, many of the Indian importers tried to reduce the incidence of service tax by converting FOB contracts into CIF contracts requiring the foreign suppliers to arrange for transportation as well by using the services of foreign shipping lines. In order to see that tax is suffered by both Indian shipping lines and foreign shipping lines on inward transportation of goods, the importers had been made liable to pay tax on the service of inward transportation of import cargo, as it was not possible to collect it from the foreign shipping lines entering into contract with a foreign supplier for transportation of goods to India.
Following the above commercial reasoning these services also continued to be taxed under the GST regime wherein 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 was made taxable and Importer was to pay GST under reverse charge.
In the GST Regime the Government by exercising power conferred under Sec 5(3) supra issued Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 (entry 10) and Notification No. 8/2017-Integrated Tax (Rate), dated 28.06.2017(entry 9(ii)) which provides for payment of GST on ocean freight by the importer.
The entries in the respective Notifications are reproduced as below for your reference:
|Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017|
|Sl. No.||Category of Supply of Services||Supplier of service||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.|
|Notification No. 8/2017-Integrated Tax (Rate), dated 28.06.2017|
|Chapter, Section or
|Description of Service||Rate %||Condition|
|9||Heading 9965 (Goods transport services)||(ii) 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||5||Provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers and tankers) used in supplying the service has not been taken
Explanation: This condition will not apply where the supplier of service is located in non-taxable territory. [Please refer to Explanation no.(iv)*]
|[*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.]|
Recently, the Gujarat High Court in case of of Mohit Minerals Vs. UOI & Others reported in 2020-TIOL-164-AHMDGST declared Notification No. 8/2017-Integrated Tax (Rate), dated 28.06.2017 and the Entry 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 as ultra vires the IGST Act, 2017.
Let us see some of the grounds on which the above 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 has been declared ultra virus the IGST Act, 2017 by the Gujarat High Court:-
1) The writ applicant is importing goods on both CIF and FOB basis. However mainly it is importing on CIF basis were the contract is entered into between exporter and shipping line to deliver the goods at the Indian port. Thus, the transportation of goods in a vessel is the obligation of the foreign exporter. The foreign exporter enters into contract with the shipping line for availing the services of transportation of goods in a vessel. The obligation to pay consideration is also of the foreign exporter. The writ-applicant is not at all concerned with how the foreign exporter delivers the goods at the Indian port or whether the consideration of the shipping line has been paid by the foreign exporter or not. Even in a case of non-payment of the consideration of the freight by the foreign exporter, the shipping line cannot recover the consideration from the writ-applicant.
2) Since the writ applicant neither availed the service of transportation of goods in a vessel nor is he liable to pay the consideration of such service. Hence, the writ-applicant is not the ‘recipient’ of the transportation of goods in a vessel service as per Section 2(93) of the CGST Act.
3) Importer is deemed to be Service recipient via Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017.The provisions of taxing statute and that too the charging section of a taxing statute. It is a settled principle of construction of tax laws that there is no room for any intendment or presumption in tax statutes and one has to look only at the language used.
4) The writ-applicant cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service. The term ‘recipient’ has to be read in the sense in which it has been defined under the Act. There is no room for any interference or logic in the tax laws. In a taxing Act one has to merely look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. The writ-applicant cannot be made liable to pay tax on some supposed theory that the importer is directly or indirectly recipient of the service.
5) When goods are imported either on CIF value or FOB value, IGST is to be paid on the total value which includes cost of imported goods, cost of freight and insurance. Thus, having paid the IGST on the amount of freight which is included in the value of the imported goods, the impugned notifications levying tax again as a supply of service, without any express sanction by the statute, are illegal and liable to be struck down.
Hence on basis of the above points the Court reached the conclusion that no tax is leviable under the IGST 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 law.
As a result the impugned Notification No. 8/2017-Integrated Tax (Rate), dated 28.06.2017 and the Entry 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 are declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency.
Analysis of the above decision :
There is a major difference between the erstwhile Service Tax /VAT regime and the current GST regime. Under the erstwhile taxation regime tax was imposed under VAT and service tax separately and many instances involved double taxation. However GST was introduced with the objective of One Tax One Nation. However what amounts to double taxation is again a matter to be decided on case to case basis.
One must clearly understand that Import of Goods from a place outside India to the taxable territory has two supplies involved. One is the supply of Goods being Import of Goods and the parties to the transaction are the Importer and the Exporter. Another is the supply of services by way of transportation of goods by a vessel from a place outside India to a place within India provided by the Shipping line(Foreign or Indian) to the Exporter or Importer(Based on CIF or FOB Contract).
Points to be re-considered or further discussed in the decision of Mohit Minerals are as follows:
1) The Honourable High Court has struck the Notification No. 8/2017-Integrated Tax (Rate), dated 28.06.2017 and Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 and concluded that no tax is leviable under the IGST 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 law.
However in the final judgement of the High Court it is not clear as to such services of transportation by vessel has been declared ultra vires whether in case of CIF or FOB transactions or both CIF and FOB transactions since the writ was filed by the applicant for both CIF and FOB import of Goods. Since not specifically mention there is a lot of ambiguity as to which of the ocean freight services are exempt or which are taxable.
In FOB transactions it’s the Importer taking the service of transportation by vessel directly and is liable to pay the consideration to the Indian or foreign shipping line(Service Provider). POS in such case is the destination of goods i.e India in both the cases. In these cases it cannot be challenged that the importer is not the service recipient as it is directly receiving the supply of transportation services and it is separate from supply of goods.
2) The Honourable High Court has not considered the core aspect in detail, which being the definition of ‘recipient of supply of goods or services or both’. It appears that the discussion on the said aspect was carried on with a presumption that the levy does not exist and even existed, it would be ultra-vires.
The term recipient is defined under Section 2(93) of the CGST Act, 2017 and on closer reading of the same it is seen that it is much wider in scope to include Importer as well. The definition has three components mentioned in sub clause (a) (b) and (c) as follows:
|Clause||Coverage||Instance||Who is the recipient|
|(a)||Supply of goods or services or both||Where consideration is payable||person who is liable to pay consideration|
|(b)||Supply of goods||Where no consideration is payable||person to whom goods are delivered or made available or to whom possession or use of goods is given or made available|
|(c)||Supply of services||Where no consideration is payable||the person to whom the service is rendered|
|and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied|
In the above case the judgment went on more hypothetical basis and held that importer cannot be called as ‘recipient’. If we further ponder on questions like (1) Is the Shipping line aware of who is the consignee to whom he is to deliver the Goods? (2) When does the obligation of the shipping line terminate in respect of the contract with the foreign exporter? (3) Is he obliged to deliver the goods to the any person on reaching the destination port or only to the Importer?, we can come to the conclusion that the shipping line that entered into a contract with the Foreign exporter is very well aware of to whom he is to deliver the goods. In CIF arrangements except the fact that the exporter bears the cost of freight all the other terms are almost similar including the ultimate risk of the goods being shipped is of the Importer. Except for this commercial term, for all other purposes, the importer and foreign exporter will be the recipient of services of shipping line.
If the intention of the legislature was to tax only the person who pays the consideration then it wouldn’t have come up with clause (b) and (c) in the definition of “recipient”. The importer in the above case can fit into the clause (c) of the definition of the recipient as per Sec 2(93) of the CGST Act, 2017. The service of transportation ends when the vessel arrives at the Indian port and since consideration is not paid by the Importer in case of CIF transactions the person to whom service is rendered can be Importer as well. The above aspect is vital and judgment should have spent more time on to the reasons why the importer does not fit in sub-section (c).
3) Also the double taxation point raised by the writ applicant can be further discussed. There are simply two types of supplies involved in case of Import of Goods. One is supply of Goods and the other is supply of transportation services. The fact that IGST is paid on CIF value which includes freight amount is because integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under the Customs Act, 1962.and should not be confused with double taxation since the supply of Service of transportation is a separate supply. ITC paid by Importer on both the supply of goods and transportation service is eligible
These two supplies should also not be considered as a composite supply in case of CIF Import Transaction as the Invoice includes total CIF value and not the breakup of cost, freight and Insurance which is otherwise a required for a composite supply.
4) In some of the paras (Ex-para197) of the case of Mohit Minerals it is seen that the writ applicant is seen misleading the court by suppressing the difference between CIF and FOB contracts the result of which is quite reflective in the final judgement as well.
5) In para 226,242,243 of the Judgement of the High Court, the Writ Applicant has mentioned that the services of transportation relating to export and import are governed by the international considerations and all countries treat the same as zero-rated or GST-free. It has given examples of taxation of Freight services in Australia and UK. However the International commercial terms may be similar in most of the countries but taxation may not be necessarily be governed by the International considerations. Australia for example follows National GST model where tax is levied by Centre with provisions for revenue sharing with Provinces/ States, while in UK VAT is a tax on consumption levied by the national government at a very high rate of 20% on almost all supplies. Hence before comparing taxation of one country with another the differences in the taxation models should also be considered.
6) The History of taxation of ocean freight in the erstwhile taxation regime should also be considered. Service tax was introduced on the ocean freight services with an Industry Object (Explained above). If the Ocean freight service by foreign Shipping line in case of imports is made ultra vires then it will render the Indian Shipping line uncompetitive once again.
7) Does the Parliament have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it?
The Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to the extra-territorial aspects or causes that have an impact on or nexus with India. If a extra-territorial aspects or causes have some impact on the interest or welfare of well being of or security of Inhabitants of India then it may exercise its legislative powers with respect to such extraterritorial aspects or causes. Hence in the above case the contract entered into between the foreign exporter and foreign shipping line has impact on the business of the Indian Shipping lines as discussed above.
GST on Ocean freight service in case of Import of Goods stands as follows on the current date:
Hence CIF and FOB contracts have its own benefits and limitations. In either of the two types of contract even if the Importer pays IGST on Total value of Goods as per Customs Act and IGST on service of ocean freight, IGST credit is always available to the Importer provided his output supplies are taxable including zero-rated. Hence any Importer should enter into CIF or FOB contracts considering which is more advantageous considering commercial terms and depending on the type of Goods Imported. Before declaring such supplies attracting double taxation one must carefully analyse the individual transactions involved in the Import of Goods via ocean.
[DISCLAIMER: The article and opinions therein is based on my understanding of the GST law and provisions prevailing as on date. The opinion may vary according to one’s interpretation of the law. It should not be relied upon as the sole basis for any decision which may affect you or your business.
Thanks to the viewers for reading. Hope you find the Article helpful. Please write on the mail [email protected] for any queries, suggestions or feedback.]
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