CA Pragya Singh
From July 2012, Service Tax shall be levied on all services other than those enumerated in the negative list U/s. 66D of Finance Act 1994 or those provided in the Mega Exemption Notification No. 25/2012. Thus after an act fulfills the conditions of the definition of the term service, it shall be verified if the service falls under the Negative List or the Mega Exemption List. If the service falls under Negative List or Mega Exemption List, tax shall not be leviable. Further service shall be provided in India (except Jammu and Kashmir) to be taxable in India and to determine the place of provision of services, the Place of Provision of Service Rules, 2012 has been notified.
In view of the above, let’s understand the taxability of ocean freight under service tax which has undergone wavy changes since the Finance Act 2016.
PLACE OF PROVISION OF SERVICE IN CASE OF OCEAN FREIGHT:
As per Rule 10, “The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of the goods……”
Thus in case of transportation of goods other than courier and goods transportation agency (i.e. transport of goods by rail, vessel, aircraft, in land waterways, etc) shall be the place of destination of the goods. Illustration in case of Ocean Transport:
|Particulars||Destination of the Goods||Place of Provision of Service|
|Transport of goods in a vessel from India to Singapore.||Singapore||Singapore|
|Transport of goods in a vessel from Singapore to India.||India||India|
Thus in case of Import of goods the place of provision of service shall be taxable territory and incase of Export of goods the place of provision of service shall be non taxable territory.
TAXABILITY OF OCEAN FREIGHT ON IMPORT TRANSACTION:
Upto 1st June 2016:
The following services were covered by Section 66D (Negative List) from 01.07.2012:
“Services by way of transportation of goods—
(ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India;………”
Hence no service tax was leviable in the case of ocean freight on import of goods even though the place of provision was taxable territory due to express provision in the negative list.
What is the rationale of having this entry in negative list?
When any goods are imported, customs duty is levied on CIF (Cost, Insurance and Freight) value of the goods. The value of the ocean freight is included in the value for goods. Levying service tax on ocean freight would tantamount to dual taxation of the same transaction.
From 1st June 2016 to 21nd January 2017:
The Finance Act, 2016, had omitted the above entry in the negative list w.e.f. 1st June 2016, making the above stated services taxable. While Ocean freight on import of goods was made taxable, the freight paid for import of goods by an aircraft remained exempted by insertion of Entry 53 in Notification 12/2012 (Mega Exemption Notification).
Before understanding the effect of the change, let us analyze types of pricing of goods in case of imports:
|Nature of Pricing||Full Form||Remarks|
|FOB||Free On Board||This refers to the shipping arrangement where the seller of the goods is responsible for delivery of the goods to the main shipping origin point. The buyer of goods is responsible for arranging and making payment for the shipping cost form the port of origin to the destination port. The buyer of goods is responsible for arrangement of Insurance.|
|CIF||Cost, Insurance and Freight||This refers to the shipping arrangement where the seller of the goods is responsible for the arrangement and payment of transportation up to the destination port. The seller is responsible for arrangement of insurance.|
|CFR||Cost and Freight||This refers to the shipping arrangement where the seller of the goods is responsible for the arrangement and payment of transportation up to the destination port. The buyer is responsible for arrangement of insurance.|
Case 1: FOB arrangement with foreign shipper:
When the contract of supply of goods between the exporter and importer was an FOB contract and the importer, hires foreign shipper, then the service provider (ship operator) being a foreigner, the importer was liable to pay service tax under reverse charge.
Case 2: FOB arrangement with domestic shipper:
If the importer hires domestic shipper, the service provider was liable to pay service tax under forward charge.
Case 3: CFR or CIF arrangement with domestic shipper:
When the contract of supply was CFR/ CIF and the foreign exporter hires domestic shipper then the domestic shipper was liable to pay service tax.
Case 4: CFR or CIF arrangement with foreign shipper:
If the exporter hires foreign shipper, then both the service provider and the service receiver are non resident and thus were falling under S. No. 34 clause (c) of Notification No. 25/2012 – ST which exempted the Services received from a provider of service located in a non- taxable territory to a service recipient located in non taxable territory. In spite of the amendment this type of transactions remained outside the ambit of taxability. This was used by the importers to make an arrangement with the exporter to avoid payment of service tax.
From 21nd January 2017 to 22nd April 2017:
In order to bring the situations covered under case 4 under the tax limb, a few amendments have been made by Notifications 1/2017 – ST, Notifications 2/2017 – ST and Notifications 3/2017 – ST, dated 21.01.2017, with effect from 22.01.2017.
Vide Notification 1/2017, the following proviso has been introduced in S.No. 34 of Notification 25/2012 – ST:
“Provided that the exemption shall not apply to –
(ii) services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.”
By this amendment the exemption available to services availed by foreign exporter from foreign shipper vanished.
What were the issues with this amendment?
This amendment gave raise to certain practical issues which were brutally criticised by the industry:
1. When both the service provider and service receiver were located out India, how the service tax in the transaction shall be paid?
Ans. The term “person liable for payment of service tax” under Rule 2 (1) of the Service Tax Rules, 1994 had been amended vide Notification 2/2017 ST Dt. 12.01.2017 with effect from 22.01.2017 to include the following:
“(EEC) in relation to 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, the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods.”
|Nature of Service||Service Provider||Service Receiver|
|In respect of services provided or agreed to be provided by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.||NIL||100%|
By the above amendments, the following people were made liable to pay service tax in the case 4 stated earlier (CIF or CFR transactions where the foreign exporter engages foreign shipper):
|Section 29 of the Customs Act, 1962||These Sections refer to person in charge of the vessel or his authorized agent in India, who is responsible for filing of Import Manifest|
|Section 30 of the Customs Act, 1962|
|Section 38 of the Customs Act, 1962|
Hence, where a foreign exporter hires a foreign shipper for transport of goods to India, the person liable to pay tax was “the person in charge of the vessel” or his authorized agent in India. This was a peculiar case where neither the service provider nor the service receiver was liable to pay service tax, but a third party.
2. What will be the point of taxation?
Ans. Rule 7 of the Point of Taxation Rules, 2011 deals with determination of point of taxation in case of reverse charge. As per this rule, the point of taxation shall be the date of payment by the service receiver to the service provider. If the payment is not made within 3 months, then the date next following the period of three months. However, in the given case “the person in charge of the vessel” or his authorized agent in India are not the recipient of service. Even if assumed that they are recipient of service, they are not involved in the payment of Ocean freight to the service provider. It is only the exporter who pays the freight. Thus there was a tax levy, without a proper means of collection.
3. Who will bear the incidence of tax?
Ans. For “the person in charge of the vessel” or his authorized agent in India this ocean freight was neither inward service nor an outward service. There was confusion in the industry as to from whom he shall collect the tax and whether credit would be available to the person who bears the incidence of the tax. While there was no clarification on this, it was logical that “the person in charge of the vessel” or his authorized agent in India shall collect the tax from the Importer, however whether the credit of such service tax was available to the Importer was a question due to non availability of prescribed and valid documentation against which credit could be taken. May be the Importer might save the challan, against which credit is claimed.
4. What will be the value on which service Tax shall be paid?
Ans. In case of CIF or CFR transaction the ocean freight is paid by the Exporter to the Foreign Shipper. Neither the Importer nor the “the person in charge of the vessel” or his authorized agent in India were aware of the value of Ocean Freight. However, practically the service tax was paid on the Freight declared in the bill of entry for payment of customs duty.
From 23rd April 2017:
All the above stated practical issues have been resolved by the issue of Notification No. 13/2017 – ST, Notification No. 14/2017 – ST, and Notification No. 15/2017 – ST dated 13th April 2017 and effective from 23rd April 2017.
The combined effect of these notifications is that in case of CIF or CFR transaction where the ocean freight is paid by the Exporter to the Foreign Shipper for transport of goods to India,
1. The person liable to pay tax under reverse charge shall be the Importer of goods and not the “the person in charge of the vessel” or his authorized agent in India. Hence the Importer was eligible to tax the CENVAT credit based on eligible document.
2. The point of taxation shall be the date of bill of lading.
3. As the Importer is not aware of the value of Ocean Freight, he has an option to pay an amount calculated at the rate of 1.4% of the sum of cost, insurance and freight (CIF) value of such imported goods.
Given below is the summary of the waves in the taxability of Ocean Freight in case of Import:-
TAXABILITY OF OCEAN FREIGHT ON EXPORT TRANSACTION:
As discussed earlier in case of export, the place of provision of service as per Rule 10 of Place of Provision of Service Rules, 2012 shall be the destination of the goods. Ocean freight in case of export transaction is not taxable under Service Tax.
The question here is when a transporter based in India, is charging ocean freight for transport of goods outside India, is it export of service as the place of provision of service is outside India?
Ans. To be regarded as export of service, the conditions specified in Rule 6A of the Service Tax Rules, 1994 shall be satisfied. Mere place of provision of service being outside India, does not qualify a service as export of service. Hence if the conditions specified in Rule 6A of the Service Tax Rules, 1994 are not satisfied then the service shall be regarded as exempted service in the hands of the transporter and to this extent, the transporter would not be entitled to any CENVAT credit on the input services utilised in providing such service. Further, the reversal under Rule 6 of the Cenvat Credit Rules, 2004 would apply in respect of the common input services used by him.
Thus the taxability of Ocean Freight underwent numerous changes which created lot of confusion in the Industry and is now finally settled. However in view of the fact that GST might be a reality by 1st July 2017; these amendments could have been avoided by the government.
The Author is a Chartered Accountant based in Chennai and can be reached at firstname.lastname@example.org