06-Apr-2020 GST on Ocean Freight: The Wait Continues

Introduction:

The recent judgement of Gujarat High Court in the case of M/s Mohit Minerals Private Limited has brought back the topic of ‘GST on Ocean Freight’ into the limelight. While the judgement provides a much needed relief, it is important to understand the basis of the judgement and the future course of action to be taken in light of this judgement. 

Brief Background:

Tax to be levied on ocean freight is not anything that has been newly introduced under GST. Under the earlier Service Tax regime too, tax on ocean freight had to be paid under reverse charge mechanism (RCM). However, ever since its introduction it has been a topic of debate under various jurisdictional authorities.

Under an ocean freight transaction for goods imported into India, a contract is entered by an Indian importer or foreign exporter with a shipping line for facilitating transportation of goods into India. The shipping line can either be a foreign shipping line or a shipping line based in India. In case the import is on CIF (Cost including Insurance and Freight) basis, the contract with the shipping line is entered by the foreign exporter. In case the import is on FOB (Free On Board) basis, the contract entered with the shipping line is by the Indian importer. 

Need for the levy:

Before getting into the nitty-gritties of the legal provisions, let us first understand the need for the levy. Earlier during the service tax regime, in case a foreign shipping line transported goods to India from a place outside India, the freight amount was exempted from the levy of Service tax. Whereas in the same scenario, if it was an Indian Shipping line, the freight amount was taxable under Service Tax. This created a handicap for the domestic shipping lines whose cost would be higher to the customers due to the levy of Service tax.

It was then that the government felt it was important to create a level playing field in the industry and thereby it imposed Service tax on reverse charge mechanism (‘RCM’) basis for freight charged by a foreign shipping line. The same concept was then carried forward to the GST regime 

Mechanism for introducing the levy

Under GST, Notification 08/2017 (IGST Rate) and Notification 10/2017 (IGST Rate) both dated 28 June, 2017 (‘Notifications’) imposed the levy on ocean freight.

Entry 9 of Notification 08/2017(IGST Rate) dated 28 June 2017 prescribed the rate of tax of 5% for services provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by vessel from a place outside India upto the customs station in India.

Entry 10 of Notification 10/2017 (IGST Rate) dated 28 June,2017 prescribed that in case of the aforesaid transaction, importer located in the taxable territory will be the service recipient and accordingly tax has to be paid by the Indian Importer on reverse charge basis. 

The Plight:

The government introduced the levy to pay tax on RCM basis on the ocean freight under the thought process that the tax paid on reverse charge basis will still be available as Input Tax Credit (ITC) to the taxpayers.

However, there are certain class of taxpayers who are engaged in the supply of exempt goods/services. As per the provisions of the GST Law, the ITC availed by them should be reversed proportionately to the extent they provide exempt goods/services. As a result, they were not able to avail the credit and it proved to be an added cost. Consequently, various litigations began questioning the levy. 

Grounds of questioning the levy:

The levy across various jurisdictional authorities were questioned based on the following grounds:

1.      There is a case of double taxation since the tax is already paid on imports on the CIF value

In case of import of goods, tax by way of IGST is already paid along with Customs duty on the CIF value of imports which already includes the freight amount. A second levy of tax on RCM basis on the freight amount leads to double taxation. 

2.      Tax is being levied on a person who is neither the supplier nor the recipient of the service

The transaction on which the tax is levied is the ‘freight service’. However, in this case the foreign shipping line provides the service directly to the foreign exporter. The obligation to pay consideration is also of the foreign exporter. In case of non-payment of the consideration of freight by foreign exporter, the shipping line cannot recover the amount from Indian importer. Accordingly, the Indian importer is neither the supplier of freight service nor its recipient. Consequently no tax could be levied on the Indian importer. 

3.      The transaction has taken place outside India

The supplier i.e. the foreign shipping line as well as receiver of service i.e the foreign exporter are located in the non-taxable territory. Just because the goods are delivered in India does not mean that the transaction is taking place in India. The jurisdiction of the said transaction does not fall in India and consequently no tax can be levied on it. 

4.      Notifications imposing the levy are beyond the powers conferred by the statute

The said notifications have been issued under Section 5(3) of the Integrated Goods and Services Tax Act,2017 (‘IGST Act’) which give powers to the government to notify the services on which tax has to be paid on reverse charge basis by the ‘recipient’ of services. As per Section 5(3) of the IGST Act, only the service recipient can be liable to pay tax. The said section does not further provide the Government to specify the other person (other than the recipient of service) liable to pay tax. However, the Notification specified that the importer of goods located in the taxable territory is the service recipient and accordingly liable to pay tax.  

In this case the Indian Importer is not the recipient of service. There is no provision in the IGST Act by which tax on such transactions can be levied on the Indian Importer. It is a settled principle of law that if a delegated legislation goes beyond the power conferred by the statute, such delegated legislation has to be declared ultra vires.   

5.      Notifications are contrary to the concept of Composite Supply

Section 8 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) states the concept of ‘Composite supply’, wherein it mentions that where two or more supplies which are naturally bundled are supplied together then they shall be treated as a single supply. However, in case tax is charged separately on the freight portion apart from tax on the CIF portion, it defies the concept of composite supply. 

6.      Improper basis of Valuation

The Notification also specifies that in cases of CIF where the value of freight is not known, 10% of the CIF value of imports shall be deemed to be the amount of freight. Such vague basis of valuation does not hold valid in law. 

7.      Neither an inter-state supply nor an intra-state supply

The supply of service of transportation of goods by the foreign exporter to the foreign shipping line from a place outside India upto the customs station of clearance in India is neither an inter-state supply nor an intra-state supply. Accordingly, no tax can be levied and collected from the Indian importer.  

Judgement of the courts:

·         Earlier various Authority of Advance Ruling, the AAR including those of Andhra Pradesh, Karnataka, Madhya Pradesh, and Rajasthan had held that the levy is valid in nature and tax on ocean freight should be paid on RCM basis by the Indian importer.

·         However, the Gujarat High Court in its recent judgement on 23 January 2020 in the case of M/s Mohit Minerals Private Limited has held such levy as ultra-vires and stayed the imposition of such levy. 

A practical view point:

·         Although the Gujarat High Court has pronounced the decision in favour of the taxpayers, it does not apply to all the taxpayers country vide. It can only be used as a supporting in case of litigations.

·         It is probable that the government will appeal in the Supreme Court against the decision

·         The government has also not announced or issued any notification to rescind the levy

·         Therefore in essence the government can still issue notices to the taxpayers on non-payment of tax on ocean freight 

APMH Speaks:

Although the decision has been pronounced in favour of the taxpayers, it may be recommended to pay tax on ocean freight in case ITC of the same is available and thereby avoiding any future litigation costs.

APMH would be glad to provide the readers with any further clarity and assistance in this regard.

Please feel free to write to us on info@apmh.in / jimit@apmh.in.