Service Tax on ocean freight - Hard days for importers?

MARCH 15, 2016

By Naval Kant Jha & Atul Bamne

IN this Finance Bill, Service tax is proposed to be levied on the transportation of goods by a vessel from outside India up to the customs station of clearance in India. The proposal perhaps has far reaching consequences to the importers who basically bear the freight charges either collected by shipping lines, forwarders etc. or pay to exporter situated outside India (prepaid charge). In both the situations, importer has to include the freight (ocean freight) in the CIF value of imported goods and pay the customs duty thereon. The effective date of levy of this service tax is 01.06.2016.

At present,service tax on such ocean freight is placed under negative list and, therefore, no service tax was payable on such freight element. Consequent upon the omission from the negative list, the person liable for payment of service tax would be the recipient of service in India; under Reverse Charge Mechanism.

Para 4.1(C ) of the D.O letter F.No. 334/8/2016 -TRU dated 29-02-2016,clarifies the new levy as under:-

"The entry in the Negative List that covers services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance [section 66D (p)(ii)] is proposed to be omitted with effect from 1.06.2016. Clause 146 of Finance Bill 2016 may please be seen in this regard. However such services by an aircraft will continue to be exempted by way of exemption notification [Not. No. 25/2012-ST, as amended by notification No. 09/2016-ST dated 1st March, 2016 refers]. The domestic shipping lines registered in India will pay service tax under forward charge while the services availed from foreign shipping line by a business entity located in India will get taxed under reverse charge at the hands of the business entity. The service tax so paid will be available as credit with the Indian manufacturer or service provider availing such services (subject to fulfillment of the other existing conditions). It is clarified that service tax levied on such services shall not be part of value for custom duty purposes.

In addition, Cenvat credit of eligible inputs, capital goods and input services is being allowed for providing the service by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India. Consequential amendments are being made in Cenvat Credit Rules, 2004 [Not. No. 23/2004-CE (N.T.), as amended by Sl. Nos. 2(b) and 5(h) of notification No. 13/2016-C.E. (N.T.) dated refers.]

(Clause 146 of the Bill refers)"

Thus, it is amply clear that the service tax has to be paid by a business entity located in India who receives services of transportation of goods in vessel from outside India. Although it is clarified that customs duty is not payable on the service tax amount, yet basic issueremains un-resolved as to how the value of taxable service will be determined in case where the transportation charges are pre-paid. In such cases, there may be situation when neither the agent nor the importer will be aware of the freight amount so as to determine the value of taxable services since the freight charges are paid by the exporter abroad. The same situation arises in case of outward freight paid by the entities in domestic "Door-step Delivery". In case of domestic home delivery unlike prepaid imports, the freight charges paid to transporters are available and, therefore, taxed at the hands of hiring entities.Contrary to this in case of "GHAR-POCH" (in Marathi meaning - Home Delivery of goods) by the exporters such freight actually paid or payable will not be ascertainable.

In this situation it is likely that the business entities who receive services of transportation of goods in vessels coming from outside India will face harrowing times unless specific modalities for determining value of taxable services are laid down.

(The authors are Superintendent, CEX& ST, Pune and the views expressed are strictly personal.)

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