LEVY OF IGST ON OCEAN FREIGHT IN RESPECT OF IMPORTED GOODS

[SURESH ASTEKAR]

In this Article an attempt is made to ascertain the correctness or otherwise of levy of IGST on ocean freight, on the goods imported into India, under Reverse Charge Mechanism.

IGST on service of transportation of goods by a vessel under RCM

Vide Notification No. 8/2017-Integrated Tax (Rate) Dated 28.06.2017, the Central Government has notified the integrated tax payable on the inter-State supply of services.  Sl.No.9 (ii) of the said Notification, which attracts 5% IGST, is as under:

“(ii)      Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.”

Explanation No.4 to the said Notification further provides as under:

“4.        Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10% of the CIF value (sum of cost, insurance and freight) of imported goods.”

Section 5(3) of the IGST Act empowers the Government to notify categories of supply of goods and services or both, which shall be subject to reverse charge mechanism (RCM).  In exercise of this power, the Central Government has issued Notification No.10/2017-Intergated Tax (Rate) Dated 28.06.2017 specifying the services which are liable to RCM. Sl.No.10 of the said Notification reads as under:

Sl. No.	Category of Supply of Services	Supplier of service	Recipient of Service
(1)	(2)	(3)	(4)
10	Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.

 

It may be seen that by virtue of Notifications No.10/2017-Integrated Tax (Rate) dated 28.06.2017, an importer is liable to pay IGST @ 5%, under RCM, on the transportation of goods by a vessel, where such service is provided by a person located in non-taxable territory.

Transaction of import of goods

Bringing of goods into India from a place outside India has been defined to be “import of goods” vide Section 2(10) of the IGST Act. 

Section 5(1) of the IGST Act, which is the charging Section, provides for levy of IGST, on all inter-State supplies of goods or services or both. 

Section 7(2) of the IGST act provides that supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce. 

Section 7(4) of the IGST Act provides that supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.

Section 13 (9) of the IGST Act provides that 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.

It may be seen that the interstate supplies of goods and of services (viz., import of goods; and import of services), are covered under separate provisions of Section 7(2) and 7(4) respectively. 

Therefore, once a particular supply is covered under either Section 7(2) or 7(4) of the IGST Act, it shall be taxed only under the respective category of supply and cannot be subjected to the IGST under both the provisions i.e., “supply of goods” and “supply of services” simultaneously.   In fact, this is the fundamental character of GST law and the avowed purpose of bringing in GST is to avoid multiple taxes.  It is for this purpose that the GST law has specifically identified certain transactions, although they are of mixed nature i.e., involving supply of goods as well as services, to be either supply of goods or supply of services.

Valuation of goods imported

By virtue of the proviso to Section 5(1) of the IGST Act, the IGST 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 Customs Act at the point when duties of customs are levied on the said goods. 

Section 14 of the Customs Act read with the Customs Valuation Rules provides inter alia, that the value of the imported goods shall be the value of such goods, and shall include: (a) the cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods to the place of importation; and (b) the cost of insurance to the place of importation.

Therefore, when an importer in India imports any goods from outside India, be it on CF, CIF, or FOB terms, Customs duty is to be paid on the value to be arrived by including the transportation and insurance charges. 

Thus, the IGST paid on the transaction of import of goods (which is treated as an interstate supply of goods) suffers IGST on the transportation charges as well.

Can  composite supply of import of goods be subjected to IGST under both supply of goods and supply of services?

The question that arises for consideration is:  When the transaction of “import of goods”, as an interstate supply of goods, suffers IGST, can the very same transaction be also made liable to IGST as “supply of service” of “transportation of goods by vessel”?  In other words, can a single transaction of “import of goods” be liable to IGST twice, one in the form of “supply of goods” and another in the form of “supply of service”?

Without going into the history of levy of Service Tax on ocean freight, it may be noted, in brief, that under the Finance Act, 1994, Service Tax was levied on transportation of goods by vessel.  However, the GST is supposed to subsumed within its scope all the taxes levied under the earlier law and a single tax is to be levied in the nature of GST (IGST in case of interstate supplies).

A reference may now be made to the provisions of the CGST Act, which have been made applicable to IGST Act by virtue of Section 20 of IGST Act, which determine the nature of a particular supply.

Section 2(30) of the CGST Act defines the term “composite supply”, as under:

“(30)    ‘composite supply’ means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;”

Section 2(90) of the CGST Act defines the term “principal supply” as under:

(90)     “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

Section 8 (a) of the CGST Act provides for determining tax liability in respect of composite supply, as under:

“8.        The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

(a)       a composite supply comprising two or more supplies, one of which is a

principal supply, shall be treated as a supply of such principal supply; and”

The provisions of “composite supply” [as also that of scope of supply and time and value of supply] as appearing in the CGST Act, have been specifically made applicable to IGST Act, by virtue of Section 20 (i), (ii), & (iii) of the IGST Act.

In the light of the above provisions, the nature of transaction of “import of goods” may be considered.

The goods imported under CIF terms do constitute “composite supply” comprising of “supply of goods, and the supply of services of transport and insurance”.  The “supply of goods” becomes the “principal supply” being the predominant element of the composite supply and the “transport and insurance” become ancillary supplies. 

Even in respect of CF and FOB terms of import, the importer is liable to pay IGST on the Insurance and freight by including the same in the value of the goods imported.  Consequently, the said supply also becomes a “composite supply” of goods and services and the principal supply being “import of goods” is alone liable to IGST only under one category, viz., “supply of goods”.

In view of the statutory provisions as discussed above, the transaction viz., interstate supply of goods in the form of “import of goods” can be subjected to IGST only under the category of “supply of goods” and the very same transaction cannot be subjected to IGST once again under the category of “supply of service”.

The GST Council / authorities concerned may look into the above aspects and take corrective measures.

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By: SURESH ASTEKAR

Discussions to this article

[ANANTH KUMAR]

Good Article sir.

K.G SUBRAMANIAN

[ALWAN RAMAN]

Very good analysis

[VINIT SANCHETI]

Dear Sir,

As I agree that the Section 7(2) will over ride the provisions of Section 5(3) IGST Act, 2017 with regard to the GST applicability on RCM basis for ocean freight on goods imported on CIF, CNF, CFR basis.

However, in such a case in which instance will the Sl.No.10 of IGST Notification 10/2017 read with Sl.No.9(ii) of IGST Notification 8/2017.

Regards,

Vinit Sancheti.