Ocean Freight – Understanding & Taxability

Today, A huge chunk of the global economy is dependent on goods being transported via the ocean. The shipping industry plays a very crucial role in global transportation. More than 90% of the world’s trade is done through shipping lines. Products are packed into large containers which are loaded onto vessels and sailed to their destination countries.

In common parlance, charges paid to the shipping liners or shipping companies for the transportation of export goods and imported goods through sea is called as ocean freight. This article discusses the applicability of GST on ocean freight.

For the purposes of taxability, import of goods or services is subject to levy of tax as per the provisions of the Customs Act, 1962 and IGST Act, 2017 in the GST regime.

The tax liability of Ocean freight can be divided into two types per the destination of cargo-

1. Ocean freight on Exports of goods :

As per entry number 19B of Notification No 21/2019 of CGST Act, 2017, “Services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India” exempt from GST.

This implies that where the goods being transported satisfy the definition of ‘Export of Goods’ as per the given provisions of the CGST Act, the transaction shall be covered under the above-mentioned notification and therefore, be exempt from GST.

2. Ocean freight with respect to Import of goods :

In case of import of goods, ocean freight component suffers tax twice :

First, in the case of imports, custom duty is applicable on assessable value, and the assessable value (when making CIF transactions) includes freight amount. IGST is payable on the freight element by including it in the assessable value of goods.

Second, IGST @ 5% is payable in the form of import of services (Reverse Charge Mechanism) for payment by the importer.

Therefore, IGST payment is levied twice on ocean freight in the guise as part of transaction value of imported goods.

To better understand this, note that the expense incurred due to ocean freight when importing goods into the country is divided into two types based on transaction value-

• Imports of goods on FOB (Free in Board) value.
• Import of goods on CIF (Cost, Insurance, Freight) value.

(a) Import of goods on FOB Value:

In simple terms, FOB price means the freight charges are paid by the buyer and he must bear the shipping costs entirely.

Now, there can arise two situations when importing at FOB value-

• When the shipping line is registered outside India.
• When the shipping line is registered in India.

When shipping line is registered outside India, as per Notification No. 10/2017-Integrated Tax (Rate), the importer will be liable to pay the GST under Reverse Charge Mechanism.

However, as is the case in import on CIF value, the ocean freight expenses will also be included in the assessable value subject to excise duty, therefore, once again giving rise to double taxation.

Now, when the shipping line is registered in India, the services of ocean freight cannot be classified as ‘Import of Service’ as per the CGST Act, 2017. Hence, GST shall be payable on forward charge by the shipping line itself.

• 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.

Though in such case, foreign supplier is the recipient of service with respect to transportation of goods, however, CBIC vide Notification 10/ 2017-IGST (Rate) has specified importer of goods in India being the recipient of such transport service and is liable to discharge IGST on ocean freight under reverse charge mechanism.

Now, as per section 14 of Customs Act, assessable value of goods includes freight amount. Now, IGST has already been paid on freight element when including it in the assessable value of the goods. Thus, payment of IGST separately on ocean freight will again amount to double taxation.

Conclusion :

The dilemma of double taxation continues to be an added tax burden on the importer with no clarifications from CBIC. In relation to this, the GST advance ruling authorities in Rajasthan and Uttarakhand have since confirmed the liability on the importer in such cases. This resulted in perplexities in the industry among importers in India and consequently, a writ petition was filed in Gujrat HC challenging the levy of IGST under RCM. In the landmark judgement, the Gujarat HC has rested the contentious issue by providing relief to importers in India with respect to levy of GST under RCM on ocean freight on CIF contracts.

But it is important to note that taxpayer may only take benefit of the judgment in case any litigation is pending before GST authorities on such similar matter.

Thus, any conclusions derived from the ruling may not yet are to be the norm but can only be used as a defence in similar litigations. The dispute related to the levy of IGST on ocean freight is being analysed by the High Court from time to time.

Author : Akanksha Arora