GST GST Advisory

A Complete Assessment of GST on Ocean Freight

GST on Ocean Freight

The shipping industry is an essential part of global freight transportation, and it manages global trade supply-chain. More than 90% of the world trade is done through oceans because it is affordable and also an efficient mode for transporting goods. Through waterways, a large volume of goods can be carried on vessels for long distances at a cheaper rate, in comparison to other modes of transport like railways, roadways, air, etc. The Central Government has implemented service tax on ocean freight from 22 Jan 2017 and has continued similar provisions under the GST regime.

What is Ocean freight?

Ocean freight shipping plays a significant role in the shipping of goods between countries and continents.  It offers an attractive transportation solution. It is better to opt for ocean freight if transportation time is not important for the transporter of goods and services. This mode of transportation of goods is normally used to ship large and heavy freight. Freight or commonly known as cargo is defined as goods transported for commercial profits. The shipment of cargo/freight through the ocean or sea is known as ocean freight shipping.

Ocean freight shipping is important for the world economy, as it carries the bulk of international trade.

READ  What is the Impact of the GST on Restaurant Services

The significant types of cargo which are shipped by ocean/sea include automobiles, bulk cargo containers, break-bulk cargo and heavyweight cargo.

  • The bulk cargo consists of goods which include oil, salt, scrap metal, tallow, etc. It can be explained as commodities that are neither on bunks nor in containers.
  • Break-bulk cargo is explained as material stacked on wooden pallets.
  • Project cargo and heavy weight cargo includes manufacturing equipments, power equipments and factory components.

Types of Ocean Freight with Respect to Goods/Cargo

Ocean freight is further divided into two types based on the destination of goods or cargo as follows:

  • Ocean freight with regard to imports of goods.
  • Ocean freight with respect to export of goods.

How are both the types of Ocean Freight taxed?

When both the service receiver and agent are within India, outside India, or one in India and another outside India taxation is done as mentioned below in different scenarios:

S. No   Type of Ocean Freight Location of Service Receiver   Agent Location Taxability of service
1.   Export of Goods In India In India Specific exemption for services till Sept, 2020
2.   Export of Goods In India Outside India Specific exemption of services till Sept, 2020
3.   Export of goods Outside India In India Export of service in case all the conditions are not satisfied, then service-specific exemption
4.   Export of goods Outside India Outside India Not in scope of GST  
5.   Import of goods   In India In India GST liability is charged at the rate of 5% under forward charge.
6.   Import of goods In India Outside India RCM liability must be discharged on freight paid by the service receiver.
7.   Import Outside India In India GST liability is charged at the rate of  5% under forward charge
8.   Import Out of India Out of India GST liability must be discharged by the importer as prescribed in RCM  considering 10% of CIF value as the ocean freight

What are the Exemptions in Services relating to GST on Ocean freight on Exports?

According to entry number 19B of Notification, No 21/2019 of the CGST Act, 2017 (related to GST on Ocean freight), the services provided for transportation of goods by a ship from the customs station of clearance in India to a place located out of India is exempted from GST. This condition shall apply only up to 30th September 2020. 

READ  Changes in Utilization of Input Tax Credit under the GST Act
GST-Registration

What Conditions must be satisfied to become Export of Service relating to GST on Ocean Freight?

According to section 2(6) of IGST Act, 2017, ‘export of services’ means a supply of service where:

  • The supplier of service is located in India.
  • The location of receiver of service is in India.
  • The supply of the service is made out of India.
  • Payment received for the service is in Convertible foreign exchange.
  • The receiver of service and supplier both are not a mere institution of a distinct person.

RCM Liability to be discharged on GST on Ocean freight relating to Imports

According to Serial Number 10 of the Notification no. 10/2017 of the IGST Act, 2017, RCM liability arises with respect to the services supplied by a person located in non-taxable territory by way of transportation of goods by a ship from a place out of India up to the customs station on India for clearance. The liability to discharge GST on ocean freight, under the reverse charge mechanism is on the importer, located in the taxable territory.

  • The rate of GST needs on the freight amount is 5% in accordance (IGST Rate).
  • The value of the ocean freight is deemed to be at 10% of the CIF value when the freight amount not known.
The GST liability must be discharged on forward basis to be charged at the rate of 5 %.

Case Law Related to Controversy on GST on Ocean Freight

In Mohit Minerals Pvt. Ltd Vs. Union of India

The judgment, in this case, was passed by the Honourable Gujarat High Court on 23rd January, 2020. The Honourable High court, in this case, has set aside the charges on separate integrated GST on ocean freight for import of goods made on CIF basis. It has also held that on Notification No.8/2017 – No. 9 and 10, which levies tax on the supply of service of transportation of goods by a person located in non-taxable territory to a person also in non-taxable territory from a place which is situated out of India till the customs station for clearance in India and also making the importer liable for paying such tax, are ultra-vires as per the provisions prescribed in the IGST Act, 2017.

READ  How can you obtain GST Business Loan in India?

The court, after observing that IGST was already charged and received on the import of goods on the value, including the ocean freight, the separate tax charged on components of freight was considered as an erroneous misconception. It held that the notifications which levied tax again as a supply of service, without are illegal and must be struck down. Further, it also noted that the importer in course of importing goods on CIF basis, neither took the services of transportation of goods in a ship nor he was accountable to pay the consideration of such service recieved, and hence the writ-applicant who is the importer here was not the ‘recipient’ of the ‘Transportation of Goods in a Vessel service’ under Section 2(93) of the CGST Act, 2017. It was decided here that the importer cannot be forced to pay tax on some assumed conception that the importer is directly or indirectly the receiver of service.

The Court also had a view that the service here was neither an inter-state supply service nor an intra-state supply service and that S. 7(5) (c) of the IGST Act does not apply to this type of case. The complete transaction took place in a non-taxable territory. The High Court also said that charging of tax here comes under the scope of double taxation, which is not permitted in any statute.

Conclusion


Though the Gujarat High Court held that the provisions relating charges made on ocean freight as unconstitutional, there is a need for clarity on the matter whether the other High Courts will take similar action or will the Government choose any retrospective to have any amendment to validate the levy. It is also essential for the Government to make necessary amendments to the CGST Act, 2017[1] , and the CGST Rules. It is necessary that the law makers engage with the trade businesses and deal with the concern of the stake holders to prevent any further litigation on the matter.

Trending Posted