Applicability of GST on Ocean Freight

The shipping industry plays a very crucial role in global transportation. More than 90% of the world’s trade is done through shipping lines. This article discusses the applicability of GST on ocean freight.

What is ocean freight?

Ocean freight is a method of transport by which goods and cargo is transported by ships via shipping lines. Most of the world’s trade is carried out via sea. 

Which are the sections of GST laws governing ocean freight?

The CGST Act requires the importers to pay IGST at 5% on ocean freight under the Reverse Charge Mechanism (RCM). However, the CBIC exempted the levy of GST on ocean freight with effect from 1st October 2023 vide Notification No.08/2017-Integrated Tax (Rate) dated 26th September 2023.

Section 5(3) of the IGST Act: This section notifies the supplies which are taxable to GST under the reverse charge mechanism. Under the reverse charge mechanism, a recipient of goods/service is liable to pay GST instead of the supplier.

Section 2(93) of the CGST Act: This section defines the term recipient as follows:

• The person who is liable to pay consideration where the consideration is payable for the supply of goods or services or both.
• The person to whom the service is provided, even if no consideration is payable for the supply of service.
• The person to whom goods are made available even if no consideration is payable for the supply of such goods.

Notification No. 10/2017- Integrated Tax (Rate) dated 28th June 2017: This notification stated the categories of supplies that are liable to GST under the reverse charge mechanism. The Government has included the term importer in this category. However, Notification No.08/2017-Integrated Tax (Rate) amended the original notification, removing the term “services  by  way  of  transportation  of goods  by  a  vessel  from  a  place  outside India up to the customs station of clearance in  India”, or in simpler words, ocean freight, from its purview.

Import of goods on CIF value vs import of goods on FOB value
 

The freight expense in case of import of goods can be categorised into two types based on transaction value:

• Based on CIF (Cash, Insurance and Freight) value
• Based on FOB (Free on board) value

Import of goods on CIF value: While importing goods, if no separate transportation charges are imposed on the importer by the supplier for bringing goods into India, then the value charged on the goods is called CIF value. 

In the case of a CIF transaction, the importer is not the recipient of the service of transportation of goods as per section 2(93) of the CGST Act. The supplier has contacted the shipping line and made the payment as well, and thus the supplier is the recipient of service. Thus, the importer is not liable to tax. 

Import of goods on FOB value: Now, the other situation is where the importer has hired the ocean freight service provider, and he makes the payment for the import of goods. So, here the importer can be clearly defined as a recipient as per section 2(93) above. Also, as per the above notification, the importer is included in the category of supplies liable to the reverse charge mechanism. 

Thus, if the shipping line is located in a non-taxable territory, then GST is payable by the importer, i.e. the recipient of service. If the shipping line is located in India, then the shipping line itself will have to pay GST on a forward charge.

However, in the case of imports, customs duty is applicable on assessable value, and the assessable value includes freight amount. IGST is payable on the freight element by including it in the assessable value of goods. So, the applicability of GST on an RCM basis will lead to double taxation.

Gujarat High Court judgement explained

Mohit Minerals vs Union of India (UOI)

Facts- The importer was liable to make payment of IGST at 5% under RCM (vide notification no. 8/2017) on ocean freight service. Here, both the importer and the supplier are located in the non-taxable territory. The importer was engaged in the business of importing coal and discharged the customs duty on the assessable value, which includes freight. Additionally, he was also required to pay IGST on ocean freight which leads to double taxation, and thus, the aggrieved taxpayer filed a writ petition before the Gujarat High Court.

Judgement:

• Entry No. 10 of notification 10/2017 is ultra vires of section 5(3) of the CGST Act. The goods are imported on CIF value, and thus the importer is not the recipient of service of transportation of goods. Thus, he is not liable to pay GST.
• Tax cannot be imposed twice under the same Act- As per section 14 of the Customs Act, customs duty is payable on the assessable value of goods which includes freight charges. Thus, IGST is payable on the freight element by including it in the assessable value. So, again charging IGST on freight amount will amount to double taxation, which is unconstitutional. 
• Extra territorial levy- In this case, both the supplier and the importer are located in the non-taxable territory. Such services are outside the scope of the IGST Act. In this case, IGST can be applied only if the supply is done in the taxable territory. But in this, both the service provider and service recipient are located outside India and thus the entire supply has taken place outside the taxable territory. Thus, IGST cannot be imposed on such a service.
• CIF value- The purchaser is concerned only about the purchase value and has no idea about the freight charges as they are directly paid by the supplier. Here, both are located outside India and thus, GST is not applicable.
• Thus, IGST is not payable by the Importer under the reverse charge mechanism in the case of a CIF transaction.

Delegated legislation and judicial control

Both the notifications, 8/2017 and 10/2017, are subordinate to the GST Act. Such notifications making the taxpayer liable to IGST under reverse charge are ultra vires to the IGST Act. The High Court held that it is unconstitutional as there is no statutory sanction for levy and collection of such tax.

The dispute related to the levy of IGST on ocean freight is being analysed by the High Court from time to time. But, there is no clarification whether the above Ruling can be applied in the case of FOB transactions as well.