Application of IGST on Ocean Freights Services

Taxpayers have contended that the levying of IGST on the services leads to a situation of double taxation, while the tax authorities have claimed that the tax should be paid on a reverse charge basis.

Introduction:

Ocean freight is a mode of transportation of goods using sea routes and is a common method of transportation used by exporters and importers around the world. There are two main methods by which ocean freight transportation can be done: CIF and FOB.

For import of goods on Cost, Insurance, and Freight (CIF) basis, the supplier will engage a shipping agency to transport such goods to the required port in India. For such transactions, the freight charges might be paid directly by the supplier to the shipping agency, which might both be foreign parties. For Freight on Board or Free on Board (FOB), the seller will bear the costs of movement of the goods on board the airline or ship. The rest of the expenses will be borne by the buyer.

Generally beyond the import charges, a service tax may be levied on the services being engaged for the use of the ocean freight. In India, the following taxes and duties may be levied: IGST on the import, IGST on the ocean freight services, and customs duty on the import. However the taxation of such IGST charges has been a matter of serious contention in India.
 
Taxation of Imports in India:

The GST laws of India treat supply of goods and services into the country as an inter-state supply. This means that it attracts provisions of the Integrated Goods and Service Act, 2017 (IGST). Hence, import of goods and services into India not only attract import duty and other customs related cess and charges, it will also attract IGST. The value of the goods being imported will be considered as the assessable value of the good plus the customs duty levied, and any other duty chargeable on the good.

Supply of certain services under GST laws in India also attracts tax on a reverse charge mechanism whereby the receiver of such services is liable to bear the tax. For example, in the case of legal services, the client that receives such services will pay the applicable GST on a reverse charge basis.

For goods being imported by way of ocean frights, since the foreign supplier is generally engaging the services of a foreign shipping agency for transporting the goods to India, the agency is considered a supplier of services to recipient importer in India. By way of a notification issued in 2017, the central government declared that the import of goods by way of engaging the services of ocean freights shipping would attract GST on a reverse charge basis. i.e., IGST would be levied on the act of providing the service of shipping and it will be paid by the importer in India.

Applying GST on reverse charge basis to ocean freight services was controversial as it led to a situation of double taxation wherein the importers were paying duty on the imports as well as the GST applied on supply of the ocean freight services. While certain courts have ruled against the notification to try and create clarity, the notification has not yet been repealed and there is continued dispute surrounding the issue.
 
Judiciary Rulings:

In a ruling sought by Bahl Paper Mills,  the Ahmedabad authority for advance held that even in the case that the importer had paid IGST on the CIF value of the imported goods, the importers still have to pay the IGST for the services of the ocean freights on reverse charge basis. They also stated that the credit for the IGST can be taken on the ocean freight payment if supporting documents are submitted.

Then in Mohit Minerals vs. Union of India, the Gujarat High Court held that levying IGST on ocean freights over and above the IGST on the import value of the goods was unconstitutional. The applicant was engaged in importing non-cooking coal from Indonesia, South Africa, etc. and the imported coal was being delivered to the port located in Gujarat.  They were then discharging customs duty and IGST levied on the value of the imported coal, and also the IGST being charged on the service of ocean freight which was challenged in the case.
 
The High Court held the following:

That the levy of IGST on the ocean freight was contrary to the concept of composite supply under the GST laws. Composite supply refers to situations wherein two or more supplies of goods and services are bundled naturally bundled together. In such a situation there is a principle supply and a composite supply. And the tax is charged on the principle supply. When considering the situation of import through ocean freights, the supply of the import goods is the principle supply and the service of ocean freights is a composite supply. The ocean freight service should not attract a separate tax and the notification deeming so is ultra vires of the GST law.

Secondly, as per reverse charge mechanism the tax is usually imposed on the recipient of the services. Recipient under the Act is meant to refer to the people in receipt of the services and there should not be any ambiguity in understanding the term. Here, the tax is being imposed on the importer of the goods who may not be the actual recipient of the services, which the Court finds to be violative of the Act.

The High Court recognized that the IGST tax on the ocean freight services were clearly a situation of double taxation and that the notifications issuing this is ultra vires of the GST Acts.
 
IGST on export through Ocean Freights:

The same issue of double taxation does not arise in the case of export of goods by engaging ocean freight services. Export through ocean freights have been exempted by the central government through notifications. If IGST were to be levied it could be levied if export though ocean freights could classify as an “export of service” under GST.
 
Conclusion:

While the High Court judgement brought some relief to importers, the judgement has been appealed to the Supreme Court. The three judge bench of the Supreme Court has issued plea notices and the matter is to be taken up this year. While we wait for the matter to be resolved by the Apex Court, the Gujarat High Court order has not been stayed. Hence, the charging of IGST on ocean freight services is ultra vires the GST law.