GST Regulations Concerning Ocean Freight Services

The global transportation sector heavily relies on the shipping industry, with over 90% of worldwide trade occurring via sea routes. This article delves into the Goods and Services Tax (GST) implications for ocean freight.

What Constitutes Ocean Freight?

Ocean freight is a transportation method where goods and cargo are conveyed by vessels through designated shipping lines. A significant portion of international trade is facilitated by sea.

GST Law Sections Pertaining to Ocean Freight

The Central Goods and Services Tax (CGST) Act previously mandated importers to remit Integrated Goods and Services Tax (IGST) at a 5% rate on ocean freight under the Reverse Charge Mechanism (RCM). However, the Central Board of Indirect Taxes and Customs (CBIC) subsequently exempted GST on ocean freight, effective October 1, 2023, through Notification No. 08/2017-Integrated Tax (Rate) dated September 26, 2023.

Section 5(3) of the IGST Act

This particular section outlines supplies subject to GST under the reverse charge mechanism. Under RCM, the recipient of goods or services, rather than the supplier, is responsible for paying GST.

Section 2(93) of the CGST Act: Definition of "Recipient"

This section defines a "recipient" as:

• The individual obligated to pay consideration when consideration is due for goods, services, or both.
• The individual to whom a service is provided, even if no consideration is payable for that service.
• The individual to whom goods are made available, even if no consideration is payable for those goods.

Notification No. 10/2017- Integrated Tax (Rate) dated June 28, 2017

This notification originally specified categories of supplies liable for GST under the reverse charge mechanism, including the term "importer." Nevertheless, Notification No. 08/2017-Integrated Tax (Rate) later amended this original document, removing "services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India" (i.e., ocean freight) from its scope.

Comparing CIF and FOB Import Values for Goods

Freight expenses for imported goods can be categorized based on the transaction value:

• Cost, Insurance, and Freight (CIF) value
• Free on Board (FOB) value

Importation of Goods Based on CIF Value

When importing goods under a CIF arrangement, if the supplier does not levy separate transportation charges on the importer for bringing goods into India, the total value charged is considered the CIF value. In a CIF transaction, the importer is not the service recipient for goods transportation as per Section 2(93) of the CGST Act. Since the supplier contracts and pays the shipping line, the supplier is the service recipient. Consequently, the importer is not liable for tax.

Importation of Goods Based on FOB Value

Conversely, in situations where the importer engages an ocean freight service provider and directly remits payment for the imported goods, the importer clearly qualifies as the recipient under Section 2(93). Furthermore, the previously mentioned notification included importers in the category of supplies subject to the reverse charge mechanism. Therefore, if the shipping line operates from a non-taxable territory, the importer (service recipient) is responsible for paying GST. If the shipping line is based in India, the shipping line itself pays GST under a forward charge. However, in import scenarios, customs duty applies to the assessable value, which encompasses the freight amount. IGST is then payable on the freight component by integrating it into the goods' assessable value. This would lead to double taxation if GST were also applied on an RCM basis.

Overview of the Gujarat High Court Verdict

Mohit Minerals vs. Union of India (UOI)

Case Background: An importer was obligated to pay IGST at 5% under RCM (as per Notification No. 8/2017) for ocean freight services. In this specific case, both the importer and the supplier were situated in non-taxable territories. The importer, involved in coal imports, had already paid customs duty on the assessable value, which incorporated freight. The additional requirement to pay IGST on ocean freight resulted in what appeared to be double taxation, prompting the aggrieved taxpayer to file a writ petition with the Gujarat High Court.

Court's Decision:

• Entry No. 10 of Notification 10/2017 was deemed ultra vires of Section 5(3) of the CGST Act. When goods are imported on CIF value, the importer is not the recipient of the transportation service and, therefore, is not liable for GST.
• Prohibition of Double Taxation: According to Section 14 of the Customs Act, customs duty is levied on the assessable value of goods, which already includes freight charges. Consequently, IGST is applied to the freight element as part of the assessable value. Imposing IGST again on the freight amount constitutes double taxation, which is unconstitutional.
• Extra-Territorial Jurisdiction: In this instance, both the supplier and the importer resided in non-taxable territories. Such services fall outside the purview of the IGST Act. IGST can only be applied if the supply occurs within the taxable territory. Here, both the service provider and recipient were located outside India, meaning the entire supply transpired beyond the taxable territory. Hence, IGST could not be levied on such a service.
• CIF Value Considerations: Purchasers typically focus solely on the purchase price and are often unaware of freight charges, which are directly settled by the supplier. When both parties are located outside India, GST is not applicable.
• Conclusion: Therefore, an importer is not required to pay IGST under the reverse charge mechanism for CIF transactions.

Delegated Legislation and Judicial Oversight

Both Notification 8/2017 and Notification 10/2017 are subordinate to the GST Act. These notifications, which made taxpayers liable for IGST under reverse charge, were found to be ultra vires of the IGST Act. The High Court declared them unconstitutional due to the absence of statutory authorization for the levy and collection of such taxes. While the High Court continues to review disputes concerning IGST on ocean freight, clarity regarding the applicability of this ruling to FOB transactions remains pending.