MAY 24, 2022

By CA Keshav Maloo

SUPREME Court, in its landmark judgment dated 19.05.2022 - 2022-TIOL-49-SC-GST-LB, in the case M/s Mohit Minerals Pvt. Ltd., has pronounced that there shall be no levy of IGST under reverse charge mechanism on Ocean freight in case of CIF contract.

While upholding the judgment of Gujarat High Court - 2020-TIOL-164-HC-AHM-GST, Apex Court held that recommendations of GST Council are only recommendatory and not binding on Union and State.

Further, once IGST stands levied on composite supply of goods and ocean freight services as importer, then a separate levy on the Indian importer for the supply of ocean freight services by the shipping line would be in violation of Section 8 of the CGST Act, 2017 under which composite supply has been defined.

Therefore, IGST is not leviable on ocean freight pursuant to above order of Supreme Court.

Pursuant to the above judgment, a dilemma is being faced by various businesses as to whether they should continue to pay IGST in coming months and take corresponding ITC or the same should be stopped and further where IGST has already been paid in the past period and ITC is not available or if ITC was available, then they are not able to utilise it because of accumulation for different reasons, then whether refund would be available and for how many years in the past.

We have discussed the various scenarios along with our opinion on the same:

1. Where input tax credit of IGST paid under reverse charge mechanism is not available to the taxpayer:

In case of those taxpayers who are not eligible to avail the ITC in respect of tax paid and the same becomes a cost, in our opinion, they should not pay IGST under reverse charge mechanism prospectively.

They may consider filing refund application for taxes paid in the past period.

The limitation as per Explanation (2) to Section 54 of the CGST Act, 2017 can be applied. Further, the period of limitation can be extended as per General Law of Limitation also, since the amount paid is not in the nature of tax.

2. Where ITC is available but the same gets accumulated or remains un- utilised:

Where tax was paid on the services of ocean freight under reverse charge mechanism and corresponding ITC was also availed, however, such ITC got accumulated, in our opinion, the taxpayers should not pay IGST under reverse charge mechanism prospectively.

Taxpayers may consider making an application for refund of taxes paid in the past period, where there is unutilised ITC, as per the period of limitation prescribed in GST. Further, the corresponding ITC can be reverted without any further consequences of interest/penalty because the same is being reverted without utilisation.

Further, refund application can also be made for the period prior to limitation period prescribed under GST on the basis of General Law of Limitation, as discussed in para 1 above.

3. Where tax is being paid and ITC was also availed and the same was utilised.

In this case also, in our opinion, no tax should be paid under reverse charge mechanism prospectively.

It may be noted that in case an amendment in law is introduced with retrospective effect to nullify the effect of present judgment of Supreme Court (which is a common practice now a days), in that case, there may be a liability to pay the taxes which has been stopped after the judgment.

If any such eventuality arises, then also no interest liability shall arise for past period since it is a settled principle of law that interest cannot be demanded for any liability arising out of retrospective amendment in law.

However, there can still be a litigation on corresponding ITC because tax pertains to past period whereas the time limit prescribed to avail ITC has expired. However, that too can be taken care of by issuing a self-invoice in the current date after any such retrospective amendment.

Impact on ITC already taken

There is a possibility that the ITC taken during past period can be challenged by the Department on the ground that the IGST paid on ocean freight was not in the nature of tax.

The possibility cannot be ruled out but, in our opinion, that can still be very well contested because tax was paid as per the applicable provisions of law (though now declared as ultra-vires) and therefore, ITC of tax paid is available.

[The views expressed are strictly personal.]