Service Tax On Freight Forwarding &Logistics Industry: Different Business Scenarios
With the decorated announcements of Budget 2016, an undecorated change was introduced affecting the freight forwarding and the logistics industry as a whole. The removal of negative list exemption on inward transportation of goods by vessel now levies such transportation of goods taxable.
In case services of transportation of goods are availed from a domestic entity,service tax needs to be charged by the Indian shipping company, whereas such services being availed from any foreign entity would attract tax liability under the Reverse Charge Mechanism (‘RCM’). This amendment would come in effect from June 1, 2016 and its consequential effects are outlined below.
Change in the tax regime disturbs the whole tax structure relating to various forms of transactions entered by freight forwarders (‘FF’), with customers and shipping lines. Majorly the shipments/transactions can be categorized under following categories
| TYPE OF SHIPMENT
|
LIABILITY TO PAY FREIGHT | |
| BY CONSIGNOR/SELLER | BY CONSIGNEE/BUYER | |
| Delivered Duty Paid (‘DDP’) | Entire Liability | No |
| Ex-Works (‘EXW’) shipment | No | Entire Liability |
| Cost-insurance-Freight (‘CIF’) shipment | Liability to deliver till port of Consignee’s country | Liability for transportation of goods from domestic port to factory/warehouse |
| Free-on-Board (‘FOB’) shipment | Liability to deliver till port of Consignor’s country | Liability for transportation of goods from foreign port to his factory/warehouse |
It is pertinent to note that the scope of CIF and FOB transactions change with inward and outward transactions respectively.
Considering the aforesaid, it is essential to understand the various legs on transaction involved in providing transportation of goods services by vessel.Basis the origin and destination of the transaction,analysis of each transaction from point of view of service tax is encapsulated below:
Inward Shipments – Shipments Coming Into India
| INWARD SHIPMENT | |||
| TYPE OF SHIPMENT | LEGS OF TRANSACTIONS | SCOPE | ANALYSIS |
| Delivered Duty Paid (‘DDP’)
|
a. Between Consignor and Foreign FF | Contract for delivery of goods from outside India to factory/warehouse of consignee in India | No service tax since Consignor and Foreign FF located outside India |
| b. Between Foreign FF and Domestic FF | Contract to perform the Indian leg of shipment, on behalf of Foreign FF and not the Consignor or Consignee | Service tax chargeable under Rule-10 of Place of Provision Rules, 2012 (‘POPS’) | |
| Ex-Works (‘EXW’) | a. Between Consignee and Domestic FF | Contract for delivery of goods from outside India to factory/warehouse of consignee in India | Service tax chargeable under Rule10 of POPS, including the amount of inward ocean freight |
| b. Between Domestic FF and Foreign FF | Contract to performthe origin leg of transaction in the foreign countryon behalf of Domestic FF and not the Consignor or Consignee | Services performed outside India for Domestic FF in relation to transportation of goods to India, would attract service tax under RCM , under Rule 10 of POPS, payable by Domestic FF | |
| Cost-insurance-Freight (‘CIF’) | a. Between the Consignor and Foreign FF | Contract to deliver goods till the port of importation (India), including respective clearance and freight charges | No service tax payable, since Consignor and Foreign FF located outside India |
| b. Between Consignee and Domestic FF | Contract for transportation of goods from domestic port to the factory/warehouse of consignee | Service tax chargeable on entire consideration under Rule-10 of POPS | |
| Free-on-Board (‘FOB’)
|
a. Between Consignor and Foreign FF | Contract to deliver goods till the port of exportation (foreign port) | No service tax payable, since Consignor and Foreign FF located outside India |
| b. Between Consignee and Domestic FF | Contract for transportation of goods from foreign port to factory/warehouse of consignee, including clearance and freight charges | Service tax chargeable on entire consideration, including ocean freight, under Rule-10 of POPS | |
Outward Shipments – Shipments Going From India
| OUTWARD SHIPMENT | |||
| TYPE OF SHIPMENT | LEGS OF TRANSACTIONS | SCOPE | ANALYSIS |
| Delivered Duty Paid (‘DDP’)
|
a. Between Consignor and Domestic FF | Contract for delivery of goods from India to factory/warehouse of consignee outside India | No service tax payable as per Rule-10 of POPS, since destination of goods is outside India |
| b. Between Domestic FF and Foreign FF | Contract to perform the destination leg of shipment in foreign country, on behalf of Domestic FF | No service tax chargeable under Rule-10 of POPS
However, tax authorities may take a stringent view and tax the same under Rule-4 of POPS |
|
| Ex-Works (‘EXW’) | a. Between Consignee and Foreign FF | Contract for delivery of goods from India to factory/ warehouse of consignee outside India | No service tax payable, since Consignee and Foreign FF located outside India |
| b. Between Foreign FF and Domestic FF | Contract to perform the origin leg of transaction in India, on behalf of Foreign FF and not the Consignor or Consignee | Services performed in India for Foreign FF in relation to transportation of goods from India, would not attract service taxunder Rule 10 of POPS
This transaction would qualify as export of service |
|
| Cost-insurance-Freight (‘CIF’) | a. Between Consignor and Domestic FF | Contract to deliver goods till the port of importation (foreign country), including respective clearance and freight charges | No service tax chargeable under Rule-10 of POPS |
| b. Betweeen Consignee and Foreign FF | Contract for handling the goods from foreign port till the factory/ warehouse of consignee | No service tax payable, since Consignor and Foreign FF located outside India | |
| Free-on-Board (‘FOB’)
|
a. Between Consignor and Domestic FF | Contract to deliver goods till the port of exportation (India) | No service tax chargeable under Rule-10 of POPS.
However, tax authorities may take a stringent view and consider the same taxable under Rule-4 of POPS |
| b. Between Consignee and Foreign FF | Contract for handling the goods from Indian port till factory/warehouse of consignee, including clearance and freight charges | No service tax payable since Consignor and FF located outside India | |
The above table provides an overview of tax incidence on different types of transactions. On understanding of the same the following matter can be examined.
Fixed Rate Contracts
As a general practice, Freight Forwarders and Custom House Agents (‘CHA’) invoice certain actual charges as reimbursements from the customers and separately earn commission/agency fees thereon.In such cases since the cost of freight etc is recovered on an actual basis is disclosed, the element of service tax can be easily calculated.
However, in case ofFixed Rate Contracts (i.e. fixed amount per kg/unit would be charged from customer including all cost and respective margins),it would be difficult to estimate the amount of service tax in the absence of availabilty of specific amounts. This might force the FF to disclose the amount of ocean freight to their customers in order to charge service tax or make their contract price inclusive of service tax.
Margin On Freight – Now Taxable?
One of the most contentious issues being faced by the international freight forwarding industry is the taxability of margin earned on sale and purchase of freight. Typically, freight frowarders buy space/freight from shipping lines in bulk at reduced rates and thereafter, sell them in retail to their customers at higher rates. The differential amount is recognised in the Balance Sheet as trading income on which Service tax authorities are now-a-days asking for service tax. The contention put forth by Freight Forwarding industry is that this activity is trading that shouldn’t be subject to service tax.
With the amendment now making ocean freight taxable to service tax, the margin gained by the freight forwarders on buying and selling of ocean freight would be taxable. This should affect various show cause notices issued by service tax authorities alleging that profit share earned on freight is commission earned for promotion of shipping line’s business.
Also, some freight forwarders used to club a portion of their marginsas ‘freight’, thereby avoiding payment of service tax. This amendment would now tax all such amounts.
CENVAT Credit Becomes Cost
In relation to importers of goods engaged in pure trading activity and not having any output service tax liability under forward charge, the amount of service tax paid of ocean freight for inward transportation of goods would become cost for the importer. The service tax paid although being available as CENVAT credit, however the importer would not have any means for utilizing the same.
Further, add-on responsibility to apply for service tax registration may also arise in case where service of transportation of goods by vessel services are availed from foreign entity.
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Authored by Nimish Goel, Head of Indirect Taxes/GST and Sumit Vij, Senior Analyst at International Business Advisors. Nimish has spent almost 13 years practicing indirect taxes including VAT, Service tax, Excise and Customs. He has worked with BIG4s including EY and KPMG both in India and in Europe. For any queries Nimish can be reached at [email protected]
International Business Advisors (www.ibadvisors.co) is a boutique audit, tax and consulting firm run by ex-BIG4 professionals and working extensively with multinational companies operating in varied sectors including e-commerce, mobile, manufacturing, real-estate and hospitality. IBA operate out of its offices in Delhi, Mumbai and Bangalore.
This is a very important thing about taxes on freight services. Thanks for sharing.
A firm which is in the business of Logistics Services, whether Charges relating to the Document Processing, Loading And Unloading ,Sorting ,Examination, Docket Charges are liable for Service Tax even if they are charged separately ?
Sir, this is a very good article to go through. I have few questions hope you will clarify
1. Service Tax on Ocean freight Margin : As you mentioned difference is chargeable to service tax. Do you mean difference on Import Freight & Export Freight both or only on Import Freight. As I do understand as per POPS 10 for Export Freight different service tax should not be payable. Still need your guidance
2. In the case of export shipments, even in CIF, FOB, DDU, DDP, domestic FF need to charge service tax on Origin charges, am I correct?
Best regards
CA Deepak Joshi
[email protected]