GST on freight and refund to exporter of goods

[Somil B]

Transaction flow

Mr X is the trader of goods. Mr X intends to supply goods to Mr Y. As per the contract, Mr X is responsible for arranging transport facility for Mr Y. Therefore, Mr X hires transporter ABC Ltd to transport goods from his location to the location of Mr Y.

There are two parts in the above example which are discussed as under:

Part 1 - ABC Ltd provides transportation service to Mr X

ABC Ltd is supplier of transportation service and Mr X is the recipient of transportation service. Accordingly, Mr X will pay consideration ABC Ltd for transportation service.  

Part 2 -  Mr X supplies goods to Mr Y

Mr X is the supplier of goods and Mr Y is the receiver of goods. Mr X also provides transportation facility to Mr Y. Accordingly, Mr Y will pay consideration to Mr X for supply of goods and transportation services.

Considering the above example, let us understand the GST implication on these transactions:

GST implications on Part 1 -  ABC Ltd provides transportation service to Mr X

Notification No 12/2017- CT(Rate) dated 28 June 2017 provides exemption for services of transportation of goods as under:

Services by way of transportation of goods by an aircraft from customs station of clearance in India to a place outside India [Entry 19A]

Services by way of transportation of goods by an vessel from customs station of clearance in India to a place outside India [Entry 19B]

The above-mentioned entries provide exemption to service of transportation of goods by aircraft or vessel from India to outside India. The exemption is available to all airlines and shipping lines operating in India. This exemption will reduce the cost of freight expenses for exports.

The above exemptions were withdrawn from 1 October 2022

Sr No 18 of the Notification No 12/2017- CT(Rate) dated 28 June 2017 provides exemption to servicers of transportation of goods by road as under:

Services by way of transportation of goods-

(a) by road except the services of:

(i) a goods transportation agency;

(ii) a courier agency;

(b) by inland waterways 

As per above exemption, the transportation of goods by road except by Goods Transport Agency is exempted supplies as specified in this entry.

II. Place of supply provisions

A. Supplier and Recipient of transportation service are in India

Where the location of supplier as well as location of recipient of transportation services is within India then place of supply shall be determined under Section 12(8) as under:

(8) The place of supply of services by way of transportation of goods, including by mail or courier to,

(a) a registered person, shall be the location of such person;

(b) a person other than a registered person, shall be the location at which such goods are handed over for their transportation.

Provided that where the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such goods.

Sub-Section (8) provides that place of supply of service by way of transportation of goods including mail or courier shall be, in case service provider is a registered person, the location of such person and in case it is provided to a unregistered person, it will be the place where the goods are handed over.

However, the proviso states that where goods are transportation outside India then the place of supply shall be place of destination of such goods. It is to be noted that the Finance Act, 2023 has proposed to delete the above-mentioned proviso. Accordingly, once the proposed changes are notified, the place of supply when goods are transported outside India will be determined either as per clause (a) or clause (b) of Section 12(8).

B. Supplier or recipient of transportation service is outside India

Where the location of either supplier or location of recipient of transportation services is outside India then place of supply shall be determined under Section 13(9) as under:

(9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods

As per section 13(9) of the IGST Act, place of supply of service for transportation of goods other than by mail or courier will be the place of destination of goods. In case of services of transportation of goods, the place of supply of service shall be the location of the person liable to pay tax.

It is noted that the Finance Act, 2023 has proposed to delete this entire provision. Accordingly, the place of supply for above-mentioned services will be determined as per Section 13(2) once the proposed changes are effective.

The implications under current provisions and effect of proposed changes are explained with the help of scenarios in the video attached.

GST implications on Part 2 -  Mr X supplies goods to Mr Y

Section 15(1) of the CGST Act provides that the value of supply of goods or services shall be the transaction value. Further, the transaction shall include various items listed in Section 15(2) which inter-alia includes any amount charged by the supplier for anything done in respect of supply either at the time or before delivery of goods or services. Thus, incidental expenses incurred for supply of goods or services are also required to be included in the transaction value.  

In view of the above, the value of supply will include value of goods as well as transportation charges.

Further, the person exporting goods has an option to export goods with payment of tax or without payment of tax under LUT. In both the options, exporters are eligible for refund.

The impact of above-mentioned changes, discussed in part 1, with numerical examples on refund to exporter is discussed in this video.

Discussions to this article

[Raveendran PM]

What will be the impact on GST on Freight for the services provided by Supplier till 30.09.2022? Exporter availing with payment option . Was it exempt ?

[Somil B]

Yes, exemption was available to transporter upto 30.09.2022 irrespective of the option exercised by exporter.

[Raveendran PM]

Please note that am asking on supplier point of view. Supplier when availing option on with payment , will it included the freight also . If the case, the concept of Zero rated supply will fail.

Even now it as failed so ? Any recourse ?

[Somil B]

Going by the valuation provisions as dicussed by me in my video, the exporter is required to include transportation cost in value of supply irrespective of option exercised by exporter. The mechanism to provide refund under Customs needs to be modified so as to provide refund of entire tax amount paid including tax paid on freight.

[Raveendran PM]

Understood..

Precise question is whether GST on freight should have been charged by Supplier prior 01. 10. 2022.

If missed, what is the recourse?

can plea on zero rated concept can taken ?

[Nadeem Faridi]

please explain how transportation charges value will be determined under section 15(1) of CGST Act if Freight forwarders supplied these services while original services were supplied by airline or shipping line