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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.
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.
The CGST Act requires the importers to pay IGST at 5% on ocean freight under the Reverse Charge Mechanism (RCM).
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:
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.
The freight expense in case of import of goods can be categorised into two types based on transaction 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.
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.
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.