Cross-border transactions are intricate in terms of indirect tax consequences in India. It is important to understand and analyse the applicability of a goods and services tax (GST) on cross-border transactions. This is an analysis of the GST implications of some pertinent situations and advance rulings.
1. Overseas trade between local companies. Supply of goods from a place outside India to another place outside India without the goods entering the country is not taxable under the Goods and Services Tax Act, 2017, irrespective of the fact that the supplier and/or the recipient is located in India. Clause 7 of schedule III of the act declares that such merchant trade transactions are not considered supply of goods or services. However, this is not applicable in the case where services are provided with supply of goods, thus in this case, GST is levied on the supply of services from a place outside India to another place outside India. Hence, where transport, marketing or auxiliary business services are provided with a supply of goods, they attract GST.
2. Services by a provider abroad. Where technical and advisory services are provided by a non-resident outside India to someone located there, such services are generally subject to GST, and the responsibility for payment will be on the recipient. It is an import of service. However, this depends on the nature of the service being provided. If a foreign company provides technical and advisory services in relation to immovable property outside India, there will be no GST implications for either party, as the place of supply is outside India. Intermediary services are treated similarly. A non-resident having permanent establishment in India and providing technical services there is required to register and account for GST.
3. High sea sales. The GST council has clarified that final buyers are responsible for the payment of integrated goods and services tax (IGST) on filing import declarations for customs clearance. Clause 8 was added to schedule III of the GST act to provide that high sea sales and supply from customs warehouses shall not amount to either the supply of goods or supply of services. Adding value added is included in calculating GST and the buyer is responsible for establishing a link between the first contracted price of the goods and the last transaction.
4. Provision of intermediary services. Place of supply provisions are different for intermediary services wherein the place of supply is the location of the supplier i.e. location of intermediary. This means intermediaries providing service outside India will not get the benefit of zero rated tax under export and would rather be taxed at 18% GST.
In an advance ruling sought by Toshniwal Brothers, agents provided intermediary services including identifying prospective customers of products of their foreign principal. In another advance ruling sought by Sabre Travel Network India, the applicant was finding subscribers for a foreign software company. Both applicants were acting as intermediaries for foreign companies, and such agents or intermediaries have to charge GST on commissions or fees charged to foreign companies.
Recently, clarification has been issued by the Government wherein it has been mentioned that services outsourced to India or carried out in the country for foreign entities will not be treated as intermediary services and will not be subject to GST giving relief to technology sector, IT companies, financial services and research and development sectors. However, the agents, brokers, etc. acting as intermediary providing service to foreign entities will not be considered as zero-rated export and thus will be subject to 18% GST.
5. Ocean freight. Taxability of ocean freight has been the matter of dispute in India for some time now. In case shipping line is based outside India, importers are required to pay IGST @ 5% on ocean freight services under the Reverse Charge Mechanism (RCM). IGST on ocean freight can be seen in two different scenarios based on transaction value of imports.
- Where goods are imported on FOB value: Importers are required to pay IGST either under forward charge or reverse charge based on the location of shipping line whether in India or Outside India.
- Where goods are imported on CIF value: If the shipping line is in India, Importer is required to pay GST on forward charge. However, if shipping line is based outside India is a subject matter of litigation.
In an advance ruling sought by Bahl Paper Mills, the government stated that if importers have already paid IGST on the CIF value of goods imported, they are still required to pay IGST on ocean freight.
However, recently Gujrat High Court in the case of Mohit Minerals Pvt Ltd Vs UOI [2020] has pronounced that importer is not a recipient of service of transportation of goods in case of CIF contracts and thus not liable to pay GST under reverse charge. Accordingly in case of CIF contacts, if shipping line is based outside India, no GST is payable by importer on ocean freight.
6. Demurrage fees on containers. In case of delay in unloading of goods, etc. charges for cargo storage within port premises in the nature of penalty/ damages is required to be reimbursed by Indian importer to compensate the loss suffered by foreign vendor. Such charges are demurrage fees on containers. Though such charges may be covered under schedule II of CGST Act and is not liveable to GST. However, the provisions of customs include demurrage in the value of cost of transportation, therefore, the Indian importers usually opts to pay GST on demurrage charges taking a conservative view. Accordingly, the Indian Importer is also advised to treat “demurrage” as a part of “ocean freight” in their books of accounts in case they opt to pay GST on demurrage fees.
7. Acquisitions by foreign companies. The transfer of business assets such as real estate, debts and fixed assets is considered to be a supply of goods and subject to GST. The transfer of goodwill that is a trademark or brand name is considered as the supply of services subject to GST, but the transfer of a business as a going concern is considered as neither a supply of goods nor supply of service, and GST is not levied.
8. Disbursement of net foreign loans. The disbursement of a loan and associated processing and advisory fees are separate transactions, even if it is the net amount that is disbursed by the foreign company. Processing fees charged by foreign banks are the costs incurred by the bank in processing the service request of the applicant, and this is an import of services. The applicant is required to pay GST. Advisory services are dealt with similarly.
In all cases an advance ruling should be sought to avoid any later legal action by the government.
Conclusion
Cross-border transactions are an important aspect of trade and foreign exchange for any country. In the times of globalization, cross-border transactions are fairly common and are used rampantly, in terms of imports and exports.
These transactions, however, though internationally conducted, aren’t outside the purview of the tax regime prevailing in India. As discussed above, the Goods and Service Tax has its implications over such cross-border transactions, however, a clearer and well laid-down framework is required to make the taxation regime in terms of cross-border transactions simpler and smoother.
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