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Taxability of Ocean Freight on import under GST Regime
Applicability of Ocean freight charges and System of double taxation with respect to imports made in CIF terms (Cost, Insurance & Freight) and in terms of FOB (free on board).

Introduction: Evolution of Indian Taxation system has been fraught with overlapping jurisdiction between centre & state and also centre & centre. After the advent of GST, the last issue a businessman can think of is “Double Taxation”. Yes, the Government claims to levy only one tax but still there is overlapping jurisdiction.

Issues: Applicability of Ocean freight charges and System of double taxation with respect to imports made in CIF terms (Cost, Insurance & Freight) and in terms of FOB (free on board).

Analysis on the Ocean freight along with comparison with old laws as applied

Pre-GST:

In the earlier regime of indirect taxes, service tax (‘ST’) was made payable by the importer of goods in India in following sequence of events:-

The service was covered under negative list entry 66D(p)(ii);
Then it was removed from negative list with effect from 1-6-2016 but exemption was granted vide Entry 53 dated June 20 ,2012 in Mega ExemptionNotification No. 25/2012-ST retrospectively;
The notification of Mega Exemption was amended to remove Entry 53 vide Notification No. 1/2017-ST, dated January 12, 2017;
Then introduction of Notification No. 2/2017-STand 3/2017 both dated January 12, 2017 brought liability to pay ST on agents in India, foreign liner or streamer agent and not the service provider; and
Amendment was brought vide Notification No. 15/2017-STand 16/2017 both dated April 13, 2017 making liability to pay ST on importer in India.
Post GST Tax on Ocean Freight:

Under GST law, tax is charged on supply of service by way of transportation of goods to custom clearance in India @ 5% vide Notification No. 8/2017-Integrated Tax (Rate) dated June 28, 2017 is charged.

Notification No. 10/2017-Integrated Tax (Rate) dated June 28, 2017 prescribes the services in relation to which the recipient of service is liable to pay GST under reverse charge.

GST Tax on Ocean Freight

Important Note:

Therefore, both regime, levied tax to be paid by importer of goods under reverse charge mechanism (‘RCM’). Section 68(2) of Finance Act, 1994 empowered Central Government to notify the person other than SP liable to pay tax. Similarly Section 5(3) of IGST Act, specifically states the tax would be payable under reverse charge by the ‘recipient’ of supply.

Circumstances in which issue regarding GST on ocean freight may arise were as follow via diagram below:

Issue regarding GST on ocean freight

Now, let us understand the above mentioned cases with the help of Illustration below:

Whether in the case of import of goods on CIF (Cost, Insurance & Freight) basis, the Importer is liable to pay GST on the component of Ocean freight paid by the foreign supplier to the shipping company, as consideration for availing the service of transportation of goods by sea provided by the foreign shipping entity?
Whether in the case of import of goods on FOB (Free on board) basis the Importer, for the purpose of determination of value of goods for the payment of IGST on import of goods is required to exclude the value of the component of Ocean freight paid by the importer to the foreign shipping entity, on which already GST is paid by the importer being the service recipient in order to avoid double taxation?
Analysis: The services supplied by the foreign shipping entity of transportation of goods in a vessel to a port in India is an ‘inter-state supply’ in terms of section 7 of the Integrated Goods and Services Tax Act, 2017. Hence, IGST is leviable on the same under Section 5 of the IGST Act. As per the charging section i.e. Section 5, IGST has to be paid by the taxable person – Thus, as per the Notification No. 10/2017- Integrated Tax (Rate) dated 28.06.2017,

In the case of import of goods on CIF (COST, INSURANCE AND FREIGHT) basis, the Applicant (Importer) is liable to pay GST on the component of Ocean freight paid by the foreign supplier to the shipping company.

Further, Valuation of imported goods is to be done by the Customs Authority under the Customs Act, 1962 and this authority is not empowered to decide on the issue of valuation of imported goods. Therefore, this authority cannot give any findings regarding exclusion of any component of expenditure upon imported goods (Ocean freight) while determining the value of imported goods at the time of import – The question raised here is regarding the determination of valuation of imported goods at the port. The issue regarding determination of value as sought by the applicant does not fall under the purview of CGST/RGST Act, 2017 as this issue should be correctly dealt as per the relevant provisions of the Customs Act, 1962.

Relevant Cases laws and Advance Ruling are as follows:

2018 (9) TMI 1257 – AUTHORITY FOR ADVANCE RULING, RAJASTHAN

IN RE: M/S. CHAMBAL FERTILISERS & CHEMICALS LIMITED, AAR NO. RAJ/AAR/2018-19/14 dated 25 August 2018

Crux: While importing the said goods on FOB basis, the Applicant (importer) is liable to bear the cost of transportation of goods from the respective country upto Indian ports. Hence, for the transportation of the goods, the Applicant (importer) avails the services of a shipping entity for bringing the said goods to India in a vessel. In case the said shipping company is located outside India, then the Applicant importer pays the GST applicable on the supply of services of transportation of goods in a vessel on reverse charge basis in terms of Section 5(3) of the IGST Act.

Moreover, upon importation of the goods, customs duty is payable on the said goods at the time of clearance of the said goods. As per Section 7 of the IGST Act, import of goods will be considered as an inter-state supply. Hence, IGST is leviable on the same. However, as per the provisions of proviso to Section 5(1) of the IGST Act, the same is levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 (hereinafter referred to as the Customs Tariff Act’) as amended by the Taxation Laws (Amendment) Act, 2017 (hereinafter referred to as the ‘Amendment Act’), which levies the additional duty on the goods imported into the territory of India. The relevant provisions read as follows:

Section 5- Levy and Collection-


Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962

Section 3- Levy of additional duty equal to excise duty, sales tax, local taxes and other charges-

(7) Any article which is imported into India shall, in addition, be liable to Integrated tax at such rate, not exceeding forty per cent, as is leviable under section 5 of the Integrated Goods and Services Tax Act,2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section

(8) For the purposes of calculating the Integrated tax under sub-section (7) on any imported article where such tax is leviable at any percentage of its value, the value of the imported article shall, notwithstanding anything contained in section 14 of the Customs Act, 1962, be the aggregate of-

(a) the value of the imported article determined under subsection 1 1) of section 14 of the Customs Act, 1962 or the tariff value of such article fixed under sub-section (2) of that section,as the case may be; and

(b) any duty of customs chargeable on that article under section 12 of the Customs Act, 1962, and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include the tax referred to in subsection (7) A the cess referred to in sub-section (9).;

On the conjoint reading of proviso to section 5 of the IGST Act and section 3(7) of the Tariff Act, it can be inferred that integrated tax shall be levied on the goods imported into India. The said integrated tax shall be in addition to the other duties of customs as specified under section 3 of the Tariff Act. As per section 3(8) of the Tariff Act the integrated tax on the imported goods shall be levied on the value of the imported article determined in accordance with section 14(1) of the Customs Act.

Conclusion: In case of import of goods on CIF basis has to pay IGST on component of Ocean Freight paid by foreign supplier to the shipping company as per Notification No. 10/2017-lntegrated Tax (Rate) dated June 28, 2017.

Further, it can be concluded that for determination of value of import of goods on FOB basis, the component of Ocean freight will have to be included in the value of import of goods, the same falls beyond the purview of Section 97 of CGST/RGST Act, 2017.

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Categories: Goods and Services Tax