FEBRUARY 20, 2020

By Rohini Mukherjee, Joint Partner, Lakshmikumaran & Sridharan

IT is commonplace for businesses to import goods into India in the usual course of its business. Many of such imports are on Cost Insurance Freight (CIF) basis.

In the case of CIF imports, an ambiguity exists with respect to levy of GST on the importer where the services of transportation of goods in a vessel is provided by the foreign shipping line to the foreign exporter. This is commonly known as GST on ocean freight. This is a legacy dispute which has been carried forward from the erstwhile service tax regime.

In a case of import of goods on CIF basis, it is the responsibility of the foreign supplier to get the goods transported up to the customs station of clearance in India. For this purpose, a foreign shipping line is engaged by the foreign exporter and the freight amount is also payable by such exporter.

With respect to ocean freight, it is relevant to note the entry¹ providing for the rate of 5% for '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'.

In terms of the reverse charge notification ², the importer has been made liable for payment of GST on reverse charge basis in respect of service by way of transportation of goods in a vessel from a place outside India up to customs station of clearance in India provided by a person located in non-taxable territory.

To sum up the impact, if the service pertains to transport of goods in vessel from outside India to India where the service provider is outside India, the importer is liable to pay IGST under reverse charge mechanism at the rate of 5%.

The moot question here is, can the importer be made liable to pay GST on the ocean freight in case of CIF imports where the foreign shipping line which provides the service has not been engaged by the importer?

Under the GST law, IGST on notified supplies is required to be paid by the recipient on reverse charge basis ³.

So, who is a recipient under GST law? 'Recipient' of supply of goods or services, in a case where consideration is payable for the supply of goods or services, has been defined to mean the person who is liable to pay the consideration⁴.

In case of imports on CIF basis, the person who is liable for paying consideration is the foreign exporter who engages the foreign shipping line thereby making such foreign exporter the recipient. Though it is the foreign exporter who is the recipient, the reverse charge notification has deemed an importer located in the taxable territory to be the recipient of transportation services provided by a person located in non-taxable territory viz. the foreign shipping line.

A plethora of arguments are available to challenge the entry in the reverse charge Notification. It can be argued that since the foreign exporter engages the foreign shipping line and pays the amount of freight to it, the said exporter is the recipient of such transportation services and not the importer. Accordingly, the reverse charge notification cannot deem an importer to be the recipient of transportation services in case of goods imported on CIF basis.

There is also an element of double taxation which creeps in when an importer is made liable to pay IGST on the ocean freight on CIF imports. This emanates from the fact that the CIF value on which customs duty is paid includes the freight element. Thus, if IGST is also paid on the said freight amount, this will amount to double taxation which is against the general taxation principles.

With several ongoing litigations, recently, the Gujarat High Court ⁵ dealt with this issue.

The High Court observed that the reverse charge notifications levying tax on supply of ocean freight service and making the importer of goods as the person liable for paying the tax was unconstitutional as there was no statutory sanction for the levy and collection of tax. Further, the High Court observed that the supply of ocean freight service was not covered as an inter-State supply or an intra-State supply and, therefore, was not taxable under GST Law. Furthermore, the High Court observed that Sub-Section (3) of Section 5 of the IGST Act vests power on the Government to specify categories of supply on which tax shall be paid by the recipient of the supply. However, the provision does not provide that the Government may also specify the persons (other than the recipient of supply) liable to pay tax.

The aspect of double taxation as discussed earlier was also considered by the High Court.

In view of the above observations, the Court held that no tax was leviable under IGST Act on ocean freight service and the levy and collection of tax on such ocean freight service under the impugned notifications was not permissible in law. In the result, the Court declared the impugned notifications as ultra vires the IGST Act as they lacked legislative competence. Additionally, the notifications were declared unconstitutional.  

On the basis of the ratio in the aforesaid case, it is possible to argue that an importer will not be liable to pay IGST under reverse charge mechanism on ocean freight in a case where goods are imported on CIF basis from a foreign supplier.

While the judgment may bring in a sigh of relief amongst the importers especially the taxpayers with ongoing litigations, the likelihood of further litigation on this issue cannot be ruled out and the issue is yet to attain finality. Though the issue is far from settled at this point of time the decision of the Gujarat High Court can be relied upon by taxpayers in their ongoing litigation.

[The views are strictly personal.]

¹Serial No. 9(ii) of Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017

²Serial No. 10 of Notification No. 10/2017-IGST(Rate) dated 28.06.2017

³Section 5(3) of the IGST Act, 2017

⁴Section 2(93) of the CGST Act

⁵ Mohit Minerals Pvt. Ltd. vs. Union of India - 2020-TIOL-164-HC-AHM-GST