Updated on: Jan 12th, 2022
9 min read
The Goods and Services Tax (GST) is the biggest tax reform that India has seen. It has changed how goods and services are taxed in the country. This article gives a complete overview of taxation of shipping charges under GST.
Shipping charges are applicable when goods are shipped (transported or delivered) to a buyer or an end-user. The seller adds this charge to the bill (to be borne/paid by the buyer). If the product in question is taxable, then there will be a tax on the shipping charges, too, depending on the rate of tax.
Under GST, tax on the shipping, freight, and logistic charges have changed.
Under the erstwhile service tax system, when goods were transported through ships as cargo, the goods leaving the country were called exports and goods entering the country were imports. The shipping charges on these goods attracted service tax. If the transportation happened through the air, both inbound and outbound shipments were not subject to service tax. The tax liability of terminal charges, warehousing, and cargo handling is determined based on the taxability of the principal service.
Under GST, the dealers convert logistics and freight forwarding into a supply of services (which includes movement of goods through the sea, inland waterways, air, rail, or road). GST must be charged on the cumulative value of supply. If the freight charge is included, then GST on freight charges must be levied at the tax rate same as the rate charged on supply of the goods or consignment.
The tax rate would accordingly take its source from the underlying item supplied if transportation charges are not separately given. However, as per the GST law, if the freight is exclusive and separately charged, then the GST rate on transportation service is 5%. However, transportation of certain essential items are exempted under GST.
Type of GST charged on freight forwarding is based on whether the transportation is national or international. If in case of domestic freight, transportation happens from a place in India to another place in the country. In this case, both points of origin and destination have to be inside the country. On international transportation, the international freight rules are applied. This applies if both the place of origin and destination are outside India, if one of them outside India, or both outside India. Thus, this impacts the “Place of Supply” provision to determine the taxability of cross-border and inter-state transactions.
According to GST law, the place of transportation is defined as:
Once the service receiver is identified, the person liable to pay GST must be identified as the Goods Transport Agency (GTA) or the service recipient. It depends on which category the service recipient falls into as per reverse charge provisions under GST. GTA may allow the recipient to pay tax at 5% with no input tax credit, or it may pay tax at 12% with full input tax credit.
Let us now answer some of the frequently asked questions to know the impact that GST has on shipping charges.
Earlier to the implementation of GST, a manufacturer had to set up warehouses in multiple locations, although he was based out of different states to avoid CST levy and state entry taxes. The goods from his manufacturing plant would reach his own warehouses across the country, before reaching distributors and retailers. This led to higher operating costs.
Under GST, manufacturers have cut down on the number of warehouses, and because of this, warehouses now have to handle a larger input. This makes the manufacturers use a larger truck, to carry the higher tonnage of goods. It will work out to be economical and be efficient to operate, from the manufacturer’s point of view.
Amazon, for example, has hiked the easy shipping charge from 15% to 18% (service charge), under GST. When you buy a product that falls under the 5% GST bracket, the shipping charge will be 5%. If the product falls under the 18% bracket, then the shipping charge will be 18%. Please note that GST rate is charged depending on which bracket that product will fall under GST, i.e., 5%, 18%, 28%, etc.
The tax should be charged on the total value of supply. If the transportation cost is included, then GST has to be charged at the same rate of tax charged on supply.
For example, if the goods being supplied is charged at 18%, then you have to charge tax on transport cost also at 18%. If you are not charging freight charges in the invoice and is directly paid by the buyer of goods, then GTA provision has to comply.
Any person who provides service in relation to transport of goods by road, and issues a consignment note. This becomes the GTA. Others might hire vehicles for goods transportation, but only those issuing a consignment note are considered as a GTA.
A consignment note is a document against the receipt of goods, issued by a goods transportation agency. This is issued for the purpose of transport of goods by road in a goods carriage. A consignment note will be serially numbered and has the names of the consignor and consignee (buyer and seller).
It also has a registration number of the goods carriage in which the goods are transported, details of the goods, place of origin, and place of destination. It also consists of details of who pays/or have paid the tax – consigner, consignee, or the GTA.
Yes. The below goods will not be applicable for GST (only when transportation is done by a goods transport agency):
Services of hire given by a GTA is exempt from GST under Notification number 12/2017-Central Tax (Rate) dated 28th June 2017. Hence, when the tax is not payable, then input tax credit claims do not arise.
The GST is charged here considering it as an interstate supply and IGST shall apply.
For better understanding, read a host of articles on ClearTax: