The need to understand the GST tax on ocean freight came due to its peculiar nature of transaction. Here the term ‘Ocean Freight’ read by breaking two words in simple language, ocean is a large area of salt water between continents and freight implies transport charges. Thus, ocean freight is nothing but transport charges for carrying supplies over water. The situation under consideration deals with importer in India taxed for a transaction between exporter outside India and a transporter outside India for providing transportation service of goods imported India. Here the real Service Recipient (‘SR’) is exporter outside India and Service Provider (’SP’) is the person with responsibility to transport goods in India.
The intention of this article is to understand the person who is liable to pay tax and whether such transaction would lead to double taxation.
Now, let us understand ‘how ocean freight was’ and ‘how ocean freight is’ being held liable to tax:
In the earlier regime of indirect taxes, service tax (‘ST’) was made payable by the importer of goods in India in following sequence of events:-
- The service was covered under negative list entry 66D(p)(ii);
- Then it was removed from negative list with effect from 1-6-2016 but exemption was granted vide Entry 53 dated June 20 ,2012 in Mega Exemption Notification No. 25/2012-ST retrospectively;
- The notification of Mega Exemption was amended to remove Entry 53 vide Notification No. 1/2017-ST, dated January 12, 2017;
- Then introduction of Notification No. 2/2017-ST and 3/2017 both dated January 12, 2017 brought liability to pay ST on agents in India, foreign liner or streamer agent and not the service provider; and
- Amendment was brought vide Notification No. 15/2017-ST and 16/2017 both dated April 13, 2017 making liability to pay ST on importer in India.
Under GST law, tax is charged on supply of service by way of transportation of goods to custom clearance in India @ 5% vide Notification No. 8/2017-Integrated Tax (Rate) dated June 28, 2017 is charged.
Therefore, both regime, levied tax to be paid by importer of goods under reverse charge mechanism (‘RCM’). Section 68(2) of Finance Act, 1994 empowered Central Government to notify the person other than SP liable to pay tax. Similarly Section 5(3) of IGST Act, specifically states the tax would be payable under reverse charge by the ‘recipient’ of supply.
The first question under above scenario being, whether a third party not involved in a contract can be held liable to pay tax?
According to Fiancé Act, 1994, ST the provision gave power vide Section 68(2) to CG to notify person liable to pay tax. But the GST law, gives authority to CG to notify tax payable under RCM with the defect of placing liability only on the ‘recipient’. The GST law defines recipient under Section 2(93) to mean person liable to pay consideration.
Therefore, leaving question mark whether it is correct to levy GST on said service. Although, recent Advance Ruling, by Uttarakhand State in the matter of M/s Bahl Paper Mills Limited, ruled that an importer is required to pay IGST on CIF (Cost-Insurance-Freight) value of imported goods. The same may be challenged before higher authorities or an amendment authorizing CG to notify any person other than SP as laid in ST, would remove the defect.
Further, whether the same would amount to double taxation?
GST law which stated among other advantages to eliminate the double taxation i.e. the cascading effect of tax on income, is probing against its promise by levying IGST doubly on the same amount.
Let us take an example, in a consignment of import amounting to INR 100, additionally INR 10 is the amount of freight. Here, the importer pays Integrated Goods & Service Tax ‘IGST’ tax on 110 and additionally pays IGST on INR 10 under RCM. Therefore, amount of INR 10 is taxed twice once at the time of import on CIF value, which includes freight and again on freight amount.
Although law does not prohibit double taxation if statue clearly prescribes the levy and is not result of interpretation of law. In an old judgement of, Jain Brothers Vs Union of India-1970(77) ITR107 (SC), it was said Constitution does not contain any prohibition against double taxation.
Therefore, charging double taxation is not against law but the implementation of GST which was brought with the promise to eliminate double taxation does not hold true under this transaction.