GST on Ocean Freight in Imports: Legal Liability, Valuation Issues & Input Tax Credit
The imposition of the Goods and Services Tax (GST) on ocean freight in the context of import transactions has stirred a prolonged legal debate, particularly concerning Cost, Insurance, and Freight (CIF) and Free on Board (FOB) contracts. This article examines the taxability of ocean freight under India’s indirect tax regime, and explores the structural inconsistencies in the reverse charge mechanism (RCM) notifications. Drawing from jurisprudence, statutory interpretation, and fiscal policy concerns, this article seeks to elucidate the conceptual, legal, and operational landscape of ocean freight taxation under the GST law.
In the evolving domain of international trade, ocean freight constitutes a major cost component of cross-border supply chains. Under India’s GST regime, the levy of tax on ocean freight—particularly under CIF and FOB contracts—has resulted in legal controversy and administrative complexity. In CIF contracts, the foreign exporter undertakes the responsibility of transportation and bears the freight cost up to the Indian port. Conversely, under FOB contracts, the importer arranges and pays for the freight services. These distinctions are not merely contractual but have profound implications for tax liability, valuation, and credit eligibility under GST.
Legal Framework and GST Notification
The issue of GST on ocean freight originates from Notification No. 10/2017-IGST (Rate), which mandates payment of GST under RCM for transportation of goods by vessel from a place outside India up to the customs station in India. Notification No. 8/2017 further prescribes a deemed valuation of ocean freight at 10% of the CIF value. These notifications effectively extend GST liability to importers, even where the contractual freight service provider is neither located in India nor engaged by the importer.
The statutory backing for such levy is traced to Section 5(3) of the IGST Act, which empowers the government to notify services for reverse charge. However, the applicability of these notifications in CIF scenarios. This practice raises serious tax jurisprudential question as to the imposition of tax on the importer via Reverse Charge mechanism on CIF, where the importer is neither the receipt of services nor contractual party to freight services.
Reverse Charge Liability on Importers: Challenging the Concept of the ‘Recipient of Service
In the context of import transactions, the importer is unquestionably the recipient of the goods and certain associated services upon arrival at the Indian port—such as customs clearance, warehousing, and handling. Accordingly, the importer pays Integrated Goods and Services Tax (IGST) on the assessable value of the imported goods (which already includes the cost of ocean freight and insurance in CIF contracts) and also discharges customs duty as per applicable law. However, a peculiar legal anomaly arises from Notification No. 10/2017 – IGST (Rate), which mandates that the importer—despite not being the contractual recipient of the ocean freight services—is nevertheless deemed liable to pay IGST on a reverse charge basis for the freight component. This is imposed even though the ocean freight service is provided by a foreign shipping line to the foreign exporter, and not to the Indian importer. The result is that the importer becomes liable for tax on a service he neither procured nor received, raising a serious question about the legitimacy of such deemed recipient status. This construct blurs the line between actual contractual relationships and statutory fictions, creating a situation of double taxation—first, as part of the assessable value under the Customs Act, and second, as an independent service under GST. The notification, therefore, raises interpretational challenges vis-à-vis the definition of ‘recipient’ under Section 2(93) of the CGST Act and the constitutional mandate under Article 265, which prohibits taxation without authority of law. The legal fiction created by the notification attempts to assign tax liability to a person who is not the service beneficiary, thereby undermining both the substance of transaction doctrine and GST’s foundational principle of taxing actual consumption.
Post-Mohit Minerals Case Scenario: Legal Finality
The decision of the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd. (2022) marked a definitive turning point in the GST regime’s treatment of ocean freight services in CIF import contracts. The apex court upheld the Gujarat High Court’s ruling and struck down the levy of GST under the reverse charge mechanism (RCM) on ocean freight paid by importers in CIF transactions. The Court held that such a levy violated both constitutional principles and foundational GST doctrines, including the concept of composite supply, territorial nexus, and the recipient definition under Section 2(93) of the CGST Act.
Courts Observed on the substantive issue of taxability, the Court delved into the definition of ‘consideration’ under Section 2(31) of the CGST Act. It noted that a supply may be taxable even if the consideration is paid by a third party, such as the foreign exporter in a CIF contract. Nevertheless, the Court recognized that the ocean freight service, although rendered between two foreign entities, ultimately benefits the Indian importer and is nexus-linked to India, since the destination of the goods is India.
Despite acknowledging this territorial connection and affirming the power to levy tax, the Court held that the supply of ocean freight services in CIF contracts forms part of a composite supply, where the principal supply is the import of goods. Under Section 8 of the CGST Act, taxing components of a composite supply separately violates the very scheme of GST. Since IGST is already paid on the entire CIF value (including freight) at the time of customs clearance, imposing another levy on the same freight component via reverse charge would result in double taxation and disturb the integrated structure of indirect taxation.
Therefore, while the Court found the enabling provisions and notifications formally valid, it struck down the levy of IGST on ocean freight in CIF imports under RCM as being contrary to the principle of composite supply, and thus legally unsustainable.
Conclusion
While the ruling in Mohit Minerals offers substantial clarity for CIF-based import transactions, several legal and administrative issues remain. Most notably, the treatment of FOB contracts—where the importer directly contracts for freight—requires statutory guidance to avoid renewed litigation. Furthermore, the absence of a formal and uniform refund mechanism for IGST paid under the struck-down levy continues to burden importers, many of whom acted under bona fide belief. To maintain legal certainty and ensure taxpayer confidence, the GST Council and CBIC should proactively issue comprehensive circulars clarifying refund entitlements, aligning refund processing timelines, and harmonizing practices across field formations. Additionally, India’s GST regime must take this opportunity to revisit and realign its treatment of international transportation services in conformity with global VAT/GST models—grounded in neutrality, destination-based taxation, and administrative simplicity
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