APRIL 09, 2018

By K Srinivasan, IRS

FREIGHT on imports reasonably needs to form part of landed cost of Imports, is a standard dictum of costing, valuation and taxation of imports too.

Any import of goods into India attracts the levy of IGST under Section 3(7) in accordance with the provisions of Section 3(8) of the Customs Tariff Act, 1975 read with Section 5(1) of the  IGST Act, 2017.

The value for the purposes of payment IGST will be the transaction value of imported goods under Section 14 of the Customs Act, 1962, leviable to duties of customs as per Section 12 of the Customs Act, 1962.

Further, as per Rule 10 of Customs Valuation (Determination of value of imported goods) Rules, 2007, the cost of transportation up to the place of importation should be included in arriving at the transaction value.

Therefore, ocean freight paid for transport of goods from exporting country into India will be includible in the value of goods imported for the purposes of payment of customs duties and payment of IGST as well.

Thus, BCD and IGST are levied on the value including ocean freight at the time of import.

Accordingly from a long time back, the transaction value of imported goods amply provides for levy and collection of Customs duties on a comprehensive value known as CIF value in Import parlance.

CIF value is cost, plus freight & insurance on freight. FOB value on the other hand, is Free On Board Value, that does not include the element of freight and insurance which is usually borne by either Liner or the importer.

In case of FOB value, insurance & freight charges are to be loaded to the FOB value at a standard Percentage of 20% since the same needs to be factored in to arrive at the landed cost.

This is needed, in turn to arrive at the correct measure of customs duties and other attendant levies linked to Customs duties as per Customs Laws of which IGST is notably the one taken up for discussion here.

IGST is the level-paying domestic equivalent of GST on Goods produced in the Country, known more popularly earlier as the Countervailing duty.

The fact of the matter is, ever since Service Tax was introduced by the Finance Act 1994, there was always this temptation on the part of the Government, to try out at various points of time to collect service tax on the Ocean Freight element itself, in addition to the Customs duties and the Countervailing duties of excise.

In the beginning good sense prevailed and the government kept ocean freight out of service tax net.

As no one is an exception to the ­­­­­­­vicissitudes of temptation, even the Government had to fall a victim to it, one would think.

The result was, the Government tried its hand for the first time in 1998-99 informally though, at levy and collection of tax on Ocean freight under the pretext of charging service tax on the freight margins earned by the CHA's, Freight forwarders and logistics support service providers.

In its over anxiety, ocean freight charged by the operators was taxed by the Government under the pretext of calling it an independent service provided, except on a principal to principal basis, when it could be established by the Freight forwarders that the transaction was not performed in the capacity as a pure agent.

There was also an additional requirement prescribed under a Circular that to claim immunity by the Logistic support Service providers from the levy of Ocean freight.

In such circumstances, they were required to produce a certificate of registration obtained from the Surface transport Ministry to the effect that are registered with the Ministry such that they can demonstrate that Shipping Bills can be raised by them in their own individual capacity as Logistics operators.

Little needs to be said at this point in time about the ingenuity of the Pure Agency concept and the convoluted interpretations of the Revenue, to hold that reimbursable expenses are taxable.

Its persistence with the above folly lasted until ultimately proved wrong by the Hon'ble SC which dismissed the Revenue appeal in the recent landmark case of Pure Agencynamely Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India - 2018-TIOL-76-SC-ST,  that reimbursable expenses lacked the sanction of levy.

On witnessing continuous failures in litigation of losing the baby with the bath water, Government changed its approach to restrict the levy to the margins alone earned by the freighters treating it as an independent service actively and charging it to tax as commission income, which stood to reason and hence stood the legal ground as well.

In 2012, when negative list regime came, again confusion started but soon got resolved by both judicial precedence and Law that ocean freight margins would be taxable but not ocean freight itself.

Services by the way of transportation of goods by an aircraft or a vessel from a place outside India to the Customs station of clearance in India, was exempted under Sec 66 D (p) (ii) of the Finance Act.

The above entry under the Act got omitted and brought under Serial number 53 of Mega exemption Notification No. 25/2012-ST dated 20.06.2012, in a new avatar.

The Mega exemption was once again tinkered by an amending Notification No. 21/2017 dated 12.02.2017 and a proviso was inserted to the effect of reintroducing levy on Ocean freight again.

This time, for a change, the burden of tax on ocean freight was sought to be shifted by assigning the liability of tax to the steamer agent under Notification No. 2/2017-ST and 3/2017-ST both dated 12.01.2017.

The above issues were addressed by the Author elaborately in an article. The recipient alone can be designated as the person liable to service tax which was allowed under Sec 66 C (2) of the Finance Act.

This infirmity in designating the Liner/ steamer agent who is not the recipient of Service was well highlighted by the author in the said article.

It is pertinent to note that there were also other inherent problems in the Invoicing of the freight element and passing on the credit of tax by the Liner/ Steamer Agents as they are not in actual receipt of the service to be able to fulfill the CENVAT Laws to pass on the credits legitimately to the Importers.

The above position was well understood by the government and amendment came w.e.f 23.04.2017 vide Notification No. 15/2017-ST and 16/2017-ST dated 13.04.2017, fixing the importer finally liable to service tax on ocean freight on reverse charge basis as allowed under SEC 66 C (2) read with Sec 68(2) ibid.

It is worth noting that but for Sec 66 C(2) read with Rule 7 of POPS, Sec 68(2), it can't sub-serve the taxation in the above instance when both the provider of Service and recipient are located outside the taxing territory of India.

Sec 66 C(2) enables making of Rules of POPS not hurting even if tax is collected from a person in India by designating his place as the place of receipt despite the actual performance and receipt happening outside taxing jurisdiction.

However, during the period 12.01.2017 to 23.04.2017, there was a strange technical arrangement that when the CHA's paid for the above ocean freight, that tax would be discharged by CHA's on forward charge basis.

When the same was paid by the direct Importer, the tax would be payable, under revere charge by the importer as direct recipient of service in terms of Sec 66 C (2) read with Sec 68(2)ibid.

Perhaps the logic there was that the CHA's acted as agents of the Importers and hence would pay the tax upfront as a service recipient's agent located in taxing territory, with of course the facility to pass on the tax burden to the importer immediately, by raising an invoice for the same

This is an example of another adhocism of taxation which came to an end by itself in natural course, with the advent of the tax burden on ocean freight shifted from Liners/ Steamer Agents to importers w.e.f. 23.04.2017.

Little is known as to what happened to the levy and collection empowered by the Notifications No. 2/2017-ST and 3/2017-ST both dated 12.01.2017 when the Steamer Agents in a Writ petition before the Hon'ble Madras High Court won their case that the burden of tax fixed on them during the period 12.01.2017 to 23.04.2017 was without proper authority of Law.

Any tax waiver was granted or the Notifications were treated as withdrawn, it is silent in the scheme that shifted the burden to the Importers w.e..f 23.04.2017. Be that as it may. Let us now return to the new realities of life.

The new testament of Ocean Freight, under GST.

The author's concluding remark was not without recognition of a possible negative impact, of the issue of Taxing Ocean freight getting carried off to GST, in hind sight.

When a trader imports goods vis-à-vis a manufacturer exporter, he would have no chance of absorbing the cost of tax on ocean freight and they have to pass it on to the end user, thereby giving rise to an input taxed condition under GST.

This was also a cause of concern for distortion of prices which a good GST should avoid.

Let us now visit the framework of Law under GST parallel to Sec 66 C (2) read with Sec 68(2) of Finance Act. Section 2(93) of the CGST Act and Sec 5 (3) of the IGST Act can be said to be the near equivalent of Section 66 C (2) read with Sec 68(2), but not exactly.

It provides for shifting of the tax burden to the recipient of a supplier but not to any third party unconnected with the transaction as Sec 66 C (2) would have permitted under the old regime.

Kind reference of the reader is drawn to Sec 2 (93) of GST Act which recognizes the recipient to be person responsible for payment of consideration and not any third party.

Unfortunately, Notification 10/2017-IT (Rate) dt 28.06.2017 vide Sl No 10, specifies the importer as the person liable to payment of tax under reverse charge, who may not be the recipient of service when the provider of ocean freight and the recipient actually paying the consideration, are located outside the taxing territory in case of a CIF import.

About an FOB Import, as explained in detail, the very nature of transaction entails payment of freight by the Importer in taxing territory, and therefore there is no issue in fixing the burden of tax on the Importer under the aforementioned circumstances under reverse charge method in GST.

It is also worthwhile to note that Notifications No. 15/2017-ST and 16/2017-ST dated 13.04.2017 did not seek to make any distinction between CIF and FOB value, when it came to charging the said tax envisaged under it to be borne by the importer on reverse charge basis.

But as per Sec 2(93) of the GST Act, the recipient importer ought to be paying the consideration to qualify as recipient of service, in turn to be declared fit to be brought under the purview of Sl. No 10 of Notification No. 10/2015-IT(Rate) dated 28.06.2017.

Further, there is a fresh challenge before Hon'ble Gujarat HC in the case of Mohit Minerals - 2018-TIOL-2749-HC-AHM-GST that such services rendered by a provider outside India to a recipient also located outside India, should not amount to 'import of services' and, therefore, cannot be governed by the provisions of the  IGST Act  itself.

In case of CIF Imports, the above tax on importer would appear to be totally out of the question since he does not fulfill the requirement of payment of consideration and recipient of service from taxing territory.

In case of FOB, perhaps, the unfortunate importer paying for the consideration can be rightfully treated as the recipient and charged to IGST on reverse charge.

Again, the story of discrimination will continue under the new regime as well, it looks.

Advantage direct importers vis-a-vis who import through local Liners.

Disadvantage traders is, needless to state.

What about CHA's if they venture to hold the hot potatoes by paying for it? Well, they will have to pay the tax upfront. So they will drop the hot potatoes on the importers by back to back reimbursement acting as pure agents with no hopes of any freight margins.

The only way out in the above labyrinthine-situation, as per the author, would appear to reintroduce a provision akin to Sec 66 C (2) in the GST Laws to enable levy and collection of tax on reverse charge basis from anybody including a third party Importer even if he does not pay for Ocean freight even if the foreign Liner/Freighter pays for it as true recipients of the Freight.

This might call for an amendment in the basic provision of definitions under Sec 2 (93) of the CGST Act itself to align it with Sec 5(3) of the IGST Act.

It is unfortunate that the machinery provisions of levy and collection of GST on ocean freight CIF appears to be in deep waters once again.

Will the Government or the GST Council rather put more rightly, come forward to mend or end this polemical double tax on Ocean freight which is incidentally not an approved international best tax practice.

(The author is Assistant Commissioner GST, Chennai and the views expressed are strictly personal.)