GST on Ocean Freight on Reverse Charge

Ocean freight on imported goods has always been a controversial topic in indirect taxation regime. Transport of ocean freight is a physical process of transporting commodities and merchandise goods and cargo through ship line. Even under Service Tax, the issue was shuffled in and out of the negative list. We have been receiving queries from various users with respect to IGST levy on ocean freight by way of transportation of goods from non-taxable territory to taxable territory. In this article, we are examining the provisions of the GST laws as it will be applicable on ocean freight.

Transport of ocean freight is a supply of service, on which GST can be levied under the charging Section. In general, the supplier of service is liable to pay GST. Under Section 9(3) of the CGST Act or under Section 5(3) of the IGST Act the Central Government may shift the liability to pay Service Tax on the recipient of Service.

Place of Supply in case of Ocean Freight:

Section 12 of the IGST Act makes provisions for place of supply of services if both the supplier of service and recipient of service is located in India. Section 12 of the IGST Act provides that place of supply by way of transportation of goods [includes ocean freight] shall be the location of the registered recipient. In case, the recipient is not located, such place of supply shall be the location at which such goods are handed over for transportation. In case the goods are being transported outside India, place of supply shall be the destination of such goods. There is no confusion in this section.

If the supplier of service or the recipient of service is located outside India, Section 13 of the IGST Act is applicable to determine the place of supply of services. As per Section 13 of the IGST Act, 2017, where the location of supplier or the location of recipient is outside India, sub section (9) the place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods. Thus, if the supplier of such service is located outside India and a person located in India receives such service, the recipient shall be liable to pay GST under reverse charge method on import of service. There has been no confusion on the issue.

Tax on Reverse Charge:

The problem arises when both the supplier of service is located outside India and recipient of service is located outside India; the place of supply is in India as per Section 13 as the destination of such goods is in India. In such cases serial No. 10 of Notification 10/2017 Integrated Tax (Rate) Dt. 28.06.2017, the following situation is notified for reverse charge.

In case the 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; the importer, located in the taxable territory shall be responsible for payment of GST.

It may noted that the above notification 10/2017-IGST has been issued by Central Government under Section 5(3) of the IGST Act. Under the provision, only the recipient of goods or services or both can be made responsible for payment of GST. The term recipient has been defined under the GST laws, and the importer is not the recipient of service. In view of these, by making the importer responsible for payment of such taxes on reverse charge basis, the notification has clearly gone beyond the mandate of the Section and may not stand judicial scrutiny. Vires of such notifications have been challenged before the Gujrat High Court in case Mohit Minerals Pvt. Ltd. [2018 (10) G.S.T.L. 424 (Guj.)], and the issue is under consideration.

Rate of Taxes on Ocean Freight:

Serial No. 9 of the Notification 8/2017-IGST (Rate) prescribes a rate of 5% on “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.”

Thus, rate of 5% have been prescribed only when the person providing such services are located outside India, and the person receiving such services are located outside India and place of destination of goods is Indian custom station of clearance in India. Thus, the rate of 5% is not applicable when the person receiving the service is located in India. In such cases the rate of tax shall be 18%.

This author is of the view that there has been drafting mistake in the S.No. 10 of the Notification 10/2017-IGST as the intention of the government is to make the importer in India liable for GST in case both the supplier and recipient of service is outside India. If the recipient of service is located in India, the recipient shall very well be liable to discharge tax liability under reverse charge method under S.No. 1 of the same notification.

Does every person importing goods in India is liable to discharge tax liability on Ocean Freight:

Though we thought that we will receive a simplified GST Laws, the laws are quite complicated. Then we provided for authorities to clarify doubts; but unfortunately, most of the orders of Authority of Advanced Rulings under GST is biased and creates more confusion. For a tax-payer, uncertainty in law is the greatest tyranny; for unscrupulous tax collectors, it facilitates corruption. Whenever you find uncertainties in laws, understand that such uncertainties may exist by design also.

In Re: Chambal fertilizers and Chemicals Limited [2018 (17) G.S.T.L. 526 (A.A.R. – GST)], the Authority of Advanced Ruling held,

“We find that the services supplied by the foreign shipping entity of transportation of goods in a vessel to a port in India is an ‘inter-State supply’ in terms of Section 7 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as “IGST Act”). Hence, IGST is leviable on the same under Section 5 of the IGST Act. As per the charging section i.e. Section 5, IGST has to be paid by the taxable person.

The Entry No. 10 of the Notification No. 10/2017-Integrated Tax (Rate), dated 28-6-2017 (hereinafter referred to as the “RCM Notification”) reads as under: –

Thus, as per the Notification No. 10/2017-Integrated Tax (Rate), dated 28-6-2017, in the case of import of goods on CIF (Cost, Insurance and Freight) basis, the applicant (importer) is liable to pay GST on the component of ocean freight paid by the foreign supplier to the shipping company.”

In Re: Bahl Paper Mills Limited [2018 (14) G.S.T.L. 306 (A.A.R. – GST)], the AAR-GST held that “in this regard it is observed that vide Notification No. 8/2017-Integrated Tax (Rate), dated 28-6-2017 and Notification No. 10/2017-Integrated Tax (Rate), dated 28-6-2017 an importer is required to pay IGST on the ocean freight. Therefore, as on date, even if the importer has already paid IGST on CIF value imported goods, he is still required to pay IGST on ocean fright.

Taxable Transactions under GST:

Under GST “supplies are taxable”. Though, supplies of goods or services or both are taxable; supplies are taxed either as “supply of goods” or “supply of services”. Without ascertaining the nature of supply- “supply of goods” or “supply of services”, various machinery provisions of GST laws like rate of tax, place of supply, time of supply etc. cannot be brought in operations as provisions are different from supply of goods and supply of services.

Vide CGST Amendment Act, Section 7(1A) of the CGST Act has been inserted which reads as,

“(1A). where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”

Thus, it is necessary to determine first whether a transaction is supply of goods or supply of services.

Import on CIF Value:

When an importer import goods on CIF value, the ocean freight is paid by the exporter located outside India. However, the importer is not receiving any service of ocean freight. The importer is receiving goods. As the importer is not receiving any supply of service, there is no applicability of reverse charge provisions on ocean freight and GST is required to be paid as applicable on import of goods.

Let us compare the entry 10 of the Notification 10/2017-IGST to entry 3 in the same notification. GST is required to be paid on reverse charge method on services supplied by GTA. A person orders some goods, and transport was paid by the supplier. The recipient received goods. Can it be argued that the recipient received services of GTA and hence GST on reverse charge is required to be paid? No. The primary thing which is to be determined as to whether it is supply of goods or supply of services. If it is supply of goods, entry 10 of the Notification 10/2017-IGST has no role to play [even entry 1 has no role to play]. Entry 1 or 10 of the notification comes into pay when the supply is a “supply of service”.

There can be another situation- Importer paid for goods on FOB basis, and hired ocean freight service provider and makes payment for such service. He is required to pay IGST on such services received under entry-1 of the Notification 10/2017-IGST.

Let us take the issue further. The person brought goods on FOB basis, and separately paid for ocean freight. Thereafter he sold the goods to some other person on high seas sale. Now the buyer shall import the goods. Is the importer required to pay IGST on ocean freight? No. The importer is not receiving any service, he is receiving goods and appropriate amount of IGST shall be paid on such imported goods. Does the seller, who paid for ocean freight is required to pay IGST on reverse charge on ocean freight? Yes. He has received the service and required to pay IGST on reverse charge method.

[Authored by Rajesh Kumar, with assistance of Arun Kumar Singh, Advocate. Authors may be contacted in arun@rklegal.org]