Service Tax and GST onOcean Freight, Service Tax

[Prashant Gupta]

Sir

Recently in my final audit of Excise and Service Tax for pre GST era, I was taxed for Ocean Freight for the period 23rd April 2017 to 30th Juna 2017.

I was aware of notification of 1/2017 & 2/2017 of Service Tax Act but was not aware of notification no 16/2017 which transfers the liability on the Importer.

Not GST is also payable on it on RCM.

I just want to ask that don't you think that this is double taxation.

When we have pade custom duty and Excise/GST on CIF value of our goods imported than why shall we pay again Service Tax/ GST on F part of this CIF value.

Can you please explain the matter.

Posts / Replies

[rajkumar shukla]

issue is not clear.. which tax was paid on ocean freight?

[CS SANJAY MALHOTRA]

Service tax has to be paid on ocean freight under RCM from April 23. If you are aware of freight amount, then service tax @15% to be paid on same or else if freight is not known then you have to pay service tax @1.40% + Sbc and kkc of CIF value. The same is taxable in GST also @5% on 10% of CIF value.

[Prashant Gupta]

@CS Sanjay Malhotra

Sir with you due respect don't you think that this is double taxation

Once you pay custom duty as well as GST on CIF value

Then again you are paying GST on F value

[rajkumar shukla]

A valid point has been raised by you. However this is continuing since service tax regime.as regards double taxation the first time ocean freight is subject to IGST under customs Act as a part of customs duty. Igst payment on ocean freight under 10/2017 is under Igst act and I feel taxation under two different acts can not be considered as double taxation.however it is still being debated if ocean freight is paid by exporter, he should be considered as recipient of service and not the importer.

[CS SANJAY MALHOTRA]

Anything which is subject to RCM can never be treated as Double Taxation. Consider case of domestic supply of Goods, wherein in case of FOR price GST is paid on value of goods which is inclusive of freight.

Furthermore, you pay tax under RCM also on the same freight amount if services taken from transporter. It's actually the transporter liability and the burden to pay has been shifted on recipient as highlighted by Sh. Shukla ji.

The issue of non taxability of ocean freight has already been challenged in High Court as tax as recipient of service is actually the supplier of goods in case of CIF shipments and tax should not be charged.

[Rajagopalan Ranganathan]

Sir

Whether credit of service tax paid for the period April 2017 to June 2017 under rule 7 CA of Service Tax Rules, 1994 can be availed on or after 1.7.2017 (after introduction of GST)? What is the provision available for availing the credit under CGST Act, 2017 and rules made therunder?

According to sub-section 8 (a) of Section 142 of CGST Act, 2017 " where in pursuance of an assessment or adjudication proceedings instituted, whether before, on or after the appointed day, under the existing law, any amount of tax, interest, fine or penalty becomes recoverable from the person, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under this Act and the amount so recovered shall not be admissible as input tax credit under this Act.

I invite opinion of the experts of this forum.

[rajkumar shukla]

Could not find any solution to this.

[Kishan Barai]

As per Notification No. 2/2018. Central Tax (Rate); GST on Ocean Freight is 0%

[Prashant Gupta]

@Sh Kishan Barai

Can you pls explain the notification no 02/2018 Central Act GST

[Kishan Barai]

Exemption on GST from Export Freight till September 30th 2018. From nortification one can say that an exporter don’t have to pay GST on Air & Sea export freight. Earlier GST on Ocean Freight was 5% & Air Freight was 18%

Now enjoy CIF , CFR Shipment without GST . While in case of FOB Shipments the question of GST on Freight does doesn't arise.

[Prashant Gupta]

@Kishan Barai

What is the status for importers importing the material on CIF basis

[Kishan Barai]

For Importers GST on Freight has to be paid.

[Ankit Bansal]

In this case, writ petition has been filled before Hon'ble High Court by M/s Mohit Minerals and which is still pending for final order.

[gstwithtmi tmi]

@prashant: I understand that the service tax audit was conducted at your premises after Jul 2017 and they asked you to pay tax on ocean freight for the period Apr to Jun 2017. Let me know whether they asked you to pay the same as GST or Service tax?

If Service tax, is it possible to claim credit?

[Rakesh Chitkara]

Ocean freight: Fears of double taxation are misplaced - APRIL 24, 2018 - By K K Sharma, Member, Central Board of Excise & Customs (Retd.) - THERE is a widespread perception among importers and tax professionals that the iGST Act, 2017 ("iGSTA", in short) subjects ocean freight, paid on the importation of goods, to double incidence of iGST, in terms of two distinct notifications, both issued u/s 5(1) of that Act. In fact, it has now become a burning issue with at least one of them having already knocked at the door of Hon'ble Gujarat High Court (Spl Civil Application No. 726 of 2018 of Mohit Minerals Pvt Ltd vs Union of India - 2018-TIOL-06-HC-AHM-GST. The said two notifications are:

(i) No. 1/2017-IT(R) dated 28.6.2017 which sets out the iGST rates to be levied on the goods 'transaction value. This value, in terms of proviso to S.5(1) of iGSTA read with S.3(8) of the Customs Tariff Act, 1975 ("CTA") and S.14 of the Customs Act, 1962 ("CA"), includes inter alia the freight element as well; and

(ii) No. 8/2017-IT(R) dated 28.6.2017 which fixes the iGST rates on services including, as indicated against Sl. No. 9(ii) of the table appended to that notification, on 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.

2. Notably, notification No. 8/2017-IT(R) unambiguously recognizes and provides that though both the provider/supplier and recipient of service, by way of transportation of goods by a vessel from a place outside India up to the Customs station of clearance in India, may be located in a non-taxable territory, i.e. outside India, the iGST shall nevertheless beleviable on the service.

3. It is relevant to bear in mind here that import of both goods and services into India is regarded, u/s7(2) and 7(4) of iGSTA respectively, as a supply in the course of inter-state trade or commerce, and is subject to iGST u/s5(1) ibid. The iGST on goods is payable, in terms of the proviso to S.5(1) of the iGSTA read with S. 3(7) of CTA, on the value determined u/s 3(8) of CTA. Similarly, the iGST on imported services is payable on their transaction value, in the instant case freight charges, as contemplated u/s15 of cGSTA read with S.20(iii) of iGSTA.

4. The liability to pay iGST on the imported goods falls on the importer u/s12 &S.47(1) of the CA read with proviso to S.5(1) of iGSTA. In case of service imports, however, the iGST is payable by an importer on reverse charge basis only if he is the recipient of a service notified by the Government u/s 5(3) of iGSTA. The service of transportation of goods in a vessel from outside India into India is indeed one of the services (Sl. No. 10) listed under Notification No. 10/2017-IT(R) dated 28.6.2017 issued under that section.

5. The importers of goods vehemently argue that levy of same tax (iGST) on same service (ocean freight), in the manner elaborated above, amounts to double taxation. Is this argument valid? Is the freight paid on the imported goods indeed subject to double GST levy? These questions naturally throw up following three issues for consideration and determination--

A. What is the nature of supply involved here?

B. How is this supply taxable under GST law?

C. Is it indeed subject to double taxation?

But before analyzing and answering these questions, let us understand the meaning of two very pertinent and commonly used terms relating to price of imported goods, viz FOB and CIF.

6. When an importer places an order on an overseas seller for supply of goods, he pays not only the price of goods as such but also the costs and charges incurred to deliver those goods to him in India. These costs and charges inter alia include, where the goods come in a vessel, the insurance and ocean freight paid for importation of those goods. Depending on who pays the consideration for such insurance and freight – the importer himself or the overseas supplier – the price payable by the importer to the supplier is denoted, in international commercial terms, by the acronym FOB or CIF, where FOB stands for free on board and CIF for the sum of cost, insurance and freight.

7. The FOB price indicated in overseas supplier's invoice (generally followed by the name of the load port or port of export, e.g. FOB - Hongkong) implies that the price payable by the buyer/importer to the overseas supplier includes the price of goods and the costs and charges incurred only for those goods to be transported up to the load port and put on board the foreign going vessel at that port. Hauling of the goods from load port to destination port, in an FOB transaction, is the responsibility of importer himself and accordingly it is he who will pay for the associated freight and insurance.

8. The CIF price, on the other hand, generally followed by the name of destination port, e.g. CIF – NhavaSheva, means that the overseas supplier has also paid for both the insurance and freight up to the destination port and is thus entitled to collect from the importer full price of the goods payable for taking the goods to such port. This price equals the FOB price (payable up to the load port) plus freight and insurance from the load port to the destination port. The letter "C", representing cost in the CIF price, is nothing but the FOB price. (Conventionally, all international commercial terms such as FOB, CIF, CFR (cost and freight), EXW (ex-works) etc. are only 3-letter acronyms. Thus, when the price payable is CIF, i.e. FOB + I + F, the 3-letter term "FOB" is replaced by a single letter "C" to make another 3-letter term – CIF). By and large, most of the agreements for import of goods are CIF contracts.

9. Where the price of imported goods payable by the importer is FOB price and he himself engages a shipping line to move the goods from load port to destination port and pays the freight involved, he becomes the direct recipient/importer of the service of transportation of goods in a vessel. A recipient of supply of goods or services or both, according to S.2(93) of cGSTA read with S.20(i) of iGSTA, means (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration . Accordingly, he would be liable to pay iGST u/s 5(1) of iGSTA, both on the FOB value of imported goods as well as the service (freight). In a CIF transaction, on the other hand, it is the foreign supplier of the goods who seeks and pays consideration (freight) for the services of shipping line and thus becomes the recipient of the service.

10. Having understood the meaning of the said two key terms, let us now analyse the 3 issues identified in para 5 above.

A. Nature of supply

11. As noted above, though an importer places an order with his foreign supplier for supply of goods, he ends up paying not only for the goods but also other costs and charges necessary for importing those goods into India. In case of an FOB price, such cost and charges may be attributable to loading of those goods from the supplier's warehouse on to a motor vehicle; transportation from the warehouse to the load port; unloading at the port; and various port services including that required to load the goods on to the vessel. In case of CIF transaction, the services may additionally include freight and insurance payable for transporting those goods from the load port to the destination port.

12. In case of a CIF-based import contract, as already observed, the overseas seller supplies goods as well as associated services including that of transportation of goods by vessel up to the destination port. It is he who receives the shipping service and pays freight charges to the shipping line. It is he who makes to the importer in India, in the ordinary course of business, the taxable supplies of both goods and other services, including ocean freight, of which goods constitute the principal supply. Such a supply, consisting of two or more taxable supplies of goods and services, is undoubtedly naturally bundled and is made in conjunction with each other. Is it not, therefore, a composite supply, as defined and illustrated u/s 2(30) of cGSTA?

(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;

13. One may argue that, for any supply to be treated as a composite supply u/s2(30), its supplier has to be a taxable person which an overseas supplier may not be. However, it is to be kept in mind that:

(a) S.2(107) of cGST Adefines taxable person as a person who is registered or liable to be registered u/section 22 or section 24 ibid;

(b) a recipient of supply, required to pay tax under reverse charge, is indeed liable to be registered u/s.24(iii)ibid; and

(c) as noted earlier in para 4 supra, an importer of goods or services or both is indeed liable to pay tax under reverse charge.

For the purposes of S. 2(30) of cGSTA, therefore, an importer is indeed a taxable person and a composite supply received by him continues to be a composite supply.

14. As a matter of fact, the S. 14 of CA which deal with valuation of imported goods, treats such a supply,without describing it as such, as nothing but a composite supply. It is because for the purpose of levying Customs duties, ocean freight paid on imported goods is an inevitable component of their transaction (of importation) value. The S.14(1) reads as follows:-

Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be thetransaction value of such goods , that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf :

Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties andlicencefees, costs of transportation to the place of importation , insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf: (emphasis supplied)

15. It is also notable that the composite nature of supply of imported goods does not change under the CA even where the supply received is FOB value-based; the importer himself directly receives the service; and pays the ocean freight directly to the shipping line. When it comes to levy of duties of Customs, including iGST, in accordance with the provisions of S.12 CA read with S.3(7) of CTA, the transaction value of goods assessed u/s14 CA read with S.3(8) CTA,in reality, is the transaction value (CIF) of composite supply, with goods being the principal supply.

16. Evidently, therefore, import of goods is considered, under the CA and CTA too, as a composite supply of goods and services for levy of duties of Customs including the iGST u/s 3(8) of CTA read with proviso to S.5(1) of iGSTA.

B. Taxability of Ocean Freight

17. Once it is accepted that the service by way of transportation of goods by vessel from outside India into India is an element of a composite supply, of which imported goods constitute principal supply, its taxability has to be determined in terms of S. 8 of cGSTA read with S.20(ii) of iGSTA. The said S. 8 reads as under:

8. The tax liability of a composite 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. (emphasis supplied)

18. Clearly, the provisions of S.8 are mandatory in nature and leave no other option for levy of GST on the ocean freight. Thus, the entire gamut of services associated with importation of goods, including ocean freight, has to be mandatorily treated as constituents of composite supply and chargeable to iGST, in accordance with the unambiguous provisions of S.8, at the rate applicable to the goods imported. Any attempt to tax goods and services, which clearly comprise a composite supply, individually will be a clear violation of the provisions of S.8 cGSTA.

C. Double Taxation

19. We have already seen that:

(i) the two notifications, referred to in para 1 supra, prescribe the rates at which various goods and services classified thereunder are to be taxed u/s. 5 of iGSTA;

(ii) Notification No. 10/2017-IT(R) specifies the services in respect of which tax is payable by the recipient under reverse charge; and

(iii) a composite supply of goods or services or both is taxable at a rate applicable to the principal supply.

Now, assume a situation wherein a supplier of goods engages a GTA for moving the goods to a recipient located in another state; pays freight charges to the said GTA; raises an invoice on the recipient for the composite supply of goods and transportation; pays iGST on invoiced value at the rate applicable to the goods; and receives the invoiced amount including iGST from the recipient.Is the recipient liable to pay iGST on freight charges again, just because the GTA service is notified in Notification No. 10/2017-IT(R)? The answer to my mind is NO. And it is inter alia for following reasons: -

(a) S.5(1) of iGSTA provides for a levy of iGST on the inter-State supplies only of goods or services orboth (composite or mixed supply). It does not permit levy of such tax on goods or services and both, for that would indeed amount to double taxation;

(b) the supplier has made a supply of both goods and service which is unambiguously a composite supply, as defined and illustrated in S.2(30) of cGSTA, and it can be taxed only as mandated u/s.8 ibid, i.e. at the rate applicable to the principal supply of goods; and

(c) the supplier is not the recipient of the said service, in terms of S. 2(93) of cGSTA (see para 9 supra), for consideration is payable and paid to the GTA forits service by the supplier of goods.

20. It is noteworthy that the concept of composite supply and the method of its taxation, enshrined in S.8 of the cGSTA, has been made applicable to iGSTA as well u/s20(ii) ibid. Consequently, any naturally bundled supply of goods and services, comprising a composite supply, can be taxed only in the manner prescribed in S.8 of cGSTA and in no other manner. Splitting and taxing such a bundled supply of goods and ocean freight separately would make the provisions of S.8 otiose.

21. Thus, where an individual supply of goods or services has been taxed as an element of composite supply, it can't be taxed again as goods or service separately. It is true that Notification No.8/2017-IT(R) prescribes a rate of tax on the service of transportation of goods into India by vessel, even where both the supplier and recipient of the service are located outside India. However, it is equally true that under Notification 10/2017-IT(R) dated 28.6.2017 (Sl. No. 10 of the table appended thereto), it is the importer who has been made liable to pay iGST on such service under reverse charge. But the importer made liable to pay the tax thereunder is the Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory . And the S.2(26) defines an "importer", in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes 19 [any owner, beneficial owner] or any person holding himself out to be the importer. (emphasis supplied). Clearly, the importer made liable to pay iGST under reverse charge in terms of the notification 10/2017-IT(R) is the importer/recipient of goods not of service.

22. How is the importer of goods required to pay tax under iGSTA on the service which is ancillary to the import of goods? As per proviso to S.5(1), the integrated tax 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 said Act at the point when duties of customs are levied on the said goods u/section 12 of the Customs Act, 1962. And u/s12 of the CA, duties of Customs are collected at the time when the goods are cleared for home consumption u/s 47 ibid. The iGST is to be levied and collected along with other duties of Customs in accordance with the provisions of sub-sections (7) & (8) of S.3 of CTA which are reproduced below:

(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent. as is leviable u/section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined u/sub-section (8) .

(8) For the purposes of calculating the integrated tax u/sub-section (7) on any imported article where such tax is leviable at any percentage of its value, the value of the imported article shall, notwithstanding anything contained in section 14 of the Customs Act, 1962, be the aggregate of -

(a) the value of the imported article determined u/sub-section (1) of section 14 of the Customs Act, 1962 or the tariff value of such article fixed u/sub-section (2) of that section, as the case may be; and

(b) any duty of customs chargeable on that article u/section 12 of the Customs Act, 1962, and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include the tax referred to in sub-section (7) or the cess referred to in sub-section (9). (emphasis supplied)

23. Now, iGST on goods is indeed levied and collected at ad valorem rates. And what is the manner in which duty of Customs is levied and collected on imported goods? It is inter alia levied and collected on the transaction value of the imported goods as determined u/s.14 of the CA. This transaction value (CIF), as noted in paras 13 & 14 supra, includes the cost of ocean freight (F) as well. Again, when iGST is to be levied on the same goods u/s.3(7) CTA, it is levied on the value of same composite supply as calculated u/s.3(8) ibid. In other words, even u/s 3(7) & 3(8) of CTA read with S. 5(1) of iGSTA, the import is regarded as a composite supply of goods and services. Therefore, the taxability of such a supply has to be determined u/s 8(a) of cGSTA read with S.20(ii) of iGSTA. It can't be determined in any other manner.

24. In my humble view, the rationale behind the afore-noted entries against Sl. No 9(ii) of notification No. 8/2017-IT(R) and Sl. No. 10 of Notification No. 10/2017-IT(R) appears to bring the ocean freight suffered for importing goods under tax net, not to tax it even when it is otherwise taxable/taxed as composite supply. Any apprehension about double taxation of ocean freight is thus misplaced.