High Sea Sales Under GST With Example

High sea sales is a legal trade practice where the original importer of goods sells the goods to another person before the goods pass through customs clearance. Continue reading as we discuss GST on high sea sales, how high sea sales are different from imports, and the documents required to be maintained for high sea sales. 

What is high sea sales under GST?

High sea sales is a sales transaction where the buyer of the goods sells the goods to another person while the goods are still in transit on the high seas. This means that the sale happens after the goods have been dispatched from the port of loading and before they reach the port of discharge, where they are cleared for customs. 

Let's say a buyer from Mumbai purchases electronic devices from China, and while in transit and before crossing the customs frontiers of India*, the goods are sold to a buyer in Chennai. This transaction would be considered a high sea sale. High sea sales may also be made to a buyer outside India.

*Custom frontiers are defined in Section 2(4) of the Customs Act, 1962, as the perimeter of a customs station where imported goods are held before being cleared by customs officials.

The high sea sale agreement or contract needs to be signed after the goods have been dispatched from the origin and before they reach their destination in India. High sea sales also apply to goods being imported by air. Once the high sea sales agreement is concluded, the ownership is to be transferred in favour of the new buyer.

Now, how is this different from regular imports? Let’s find out!

Difference between regular imports and high sea sales

In the case of regular import of goods, the importer themselves physically receives the goods at the port/airport and brings them into the country. Goods are typically imported when domestic industries cannot produce similar goods effectively or at a lower cost. It also allows countries to obtain raw materials or commodities not available within their borders. 

On the other hand, in a high sea sales transaction, the original importer does not bring the goods into the country themselves, but instead, the ownership and title of the goods are transferred to a buyer in the same country or a different country before crossing the customs frontiers of India.

GST on high sea sales

According to Section 7(2) of the IGST Act, “Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-state trade or commerce. Hence, goods sold as part of a high sea sale before crossing the customs frontiers of India are considered an inter-state supply.  This means that IGST applies to these transactions. 

For example, goods are being imported from Singapore by M/s ABC Ltd based in Bangalore. However, before the goods are cleared for customs, they are sold to M/s XYZ Ltd. from Chennai. Being an inter-state sale, these goods will be liable to IGST.

However, there are cases of high sea sales where the goods are sold to a buyer outside of India. From the example above, let’s assume M/s ABC Ltd. sells the goods to a buyer in the USA instead of a buyer in Chennai. Will this sale be liable to GST? The short answer is no. The CGST Amendment Act of 2018 made a change to Schedule III, Para 7, regarding the treatment of high sea sales under GST. This amendment states that the supply of goods from a place in a non-taxable territory to another place in a non-taxable territory, without such goods entering into India, is not considered a supply under GST law. Therefore, no GST is charged on this transaction as the goods do not enter the taxable territory of India.

Time of levy on high sea sales in GST

According to a circular released by the CBIC, IGST on high sea sales, whether it involves one or multiple transactions, is levied and collected only at the time of importation. This means that IGST is imposed when the import declarations are filed with customs authorities for customs clearance for the first time.

Value of levy on high sea sales under GST

Any value added to the goods during the high sea sales will be taken into account when calculating the value on which IGST is collected during customs clearance. This means that the final buyer is responsible for paying GST on the total value of the goods, including any value added during the previous high sea sales when they import the goods.

A circular released by the CBEC in 2004 clarifies the value of high sea sales for customs clearance. According to the circular, the “high-seas-sales-charges” are taken to be 2% of the CIF value as a general practice. However, in case the actual high-sea-sale contract price is more than the CIF value + 2%, then the actual contract price paid by the last buyer will be the value taken for the purpose of assessment. 

For example, Mr X from Bangalore imports goods from China with a CIF (Cost, Insurance, and Freight) value of Rs. 2,000. He decides to sell the goods to Mr Y from Chennai for Rs. 2,500 as a high sea sale. However, when the goods are being cleared from customs, they will consider the value to be higher of Rs. 2,040 (i.e. $2,000 * 2%) or Rs.2,500 for customs purposes and thereafter for IGST. Since Rs.2,500, the actual price paid is higher, the same would be taken as the base for customs duty. IGST will be charged on the total of this value plus the applicable customs and other import duties.

Documentation required for high sea sales

Here is a list of documents required to get an HSS clearance:

• Commercial Invoice: Sale invoice for a high sea sales transaction in Indian currency, specifying quantities and rates of the items.
• Import Invoice: It reflects the original agreement between the consignee and the initial seller.
• Certificate of Origin: A document indicating the original destination of goods required for customs duties, sanctions, and quality certification, among others.
• Insurance Certificate: This is the original buyer's insurance for the imported goods, but can also be assigned to the next buyer of the high seas sales transaction.
• High Sea Sale Agreement (HSS agreement): It is an agreement between the original and subsequent buyers for the delivery of goods after customs clearance.
• Bill of Lading: Document showing ownership and title of goods during the high sea sale.

Can the final buyer claim an input tax credit of GST paid on high sea sales?

Yes, the final buyer in an HSS agreement can claim Input Tax Credit (ITC) for the GST paid on the transaction. 

In this type of arrangement, when the original buyer endorses the relevant documents to the subsequent buyer, the original buyer is relieved of the responsibility to pay Customs duty and IGST. Instead, the final buyer has to pay these taxes when they receive the goods. Hence, only the final buyer can then claim the ITC of the IGST they paid. 

Advance ruling on high sea sales in GST

An advance ruling provides the applicant with clarity and certainty regarding their GST tax liability. The ruling given by the Authority for Advance Ruling (AAR) is binding both on the applicant and the government authorities, ensuring a clear understanding of the tax obligations.

Here is an advance ruling related to GST on HSS:

Case: M/s. BASF India Ltd. approached the Maharashtra AAR with two questions related to the applicability of IGST and ITC reversal in the context of high sea sales.

Question 1: The applicant purchases goods from its overseas related party based on purchase orders received from its customers. The goods are sold by the applicant to its customers while in transit before customs clearance in India. The question raised was whether IGST would be levied on such sales to customers who were known to the applicant at the time of placing the order with the overseas party.

Ruling 1: The AAR answered this question in the negative, implying that IGST would not be leviable on such sales. The key factor was that the sales were made before the goods entered for customs clearance in India. (However, it is important to note that IGST will be levied at the time of import into India.) 

Question 2: The applicant also inquired whether they would need to reverse ITC on inputs, input services, and common input services used if the above transaction was not subject to IGST, considering it as an exempt supply under Section 17 of the CGST Act.

Ruling 2: The AAR responded in the affirmative, stating that input tax credit would have to be reversed to the extent of inputs, input services, and common input services used if the transaction was treated as an exempt supply.

However, this ruling only holds persuasive value for the applicant who sought it. This means that it is specific to M/s BASF India Limited and cannot be applied to other individuals or businesses.

Conclusion

High Sea Sales offer various advantages as it allows the buyer to resell the goods without waiting for them to be imported first. However, they must be accompanied by appropriate documentation and proper compliance. It is also crucial for both the high sea sale importer and buyer to demonstrate ownership of the transfer of goods that occurred before entering the customs area. If they fail to provide this proof, they may have to overpay taxes.