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GST on Ocean freight on import

Factually, an international trade is one of the most important pillars of the economic growth of the country. Both imports, as well as exports, plays a vital role in the development of a growing country like India. Obviously, import and export involve a huge amount of transportation cost.

Notably, ocean freight is the movement of goods internationally by sea route. Statistics says that approximately 90% of the goods are transported around the world via sea route. Accordingly, it is important to understand the GST implication on ocean freight.

The present article tries to clarify different ways of importation and GST liability thereon; it explains the term ‘ocean freight’, ‘CIF’ and ‘FOB’; it covers import of service vis-à-vis ocean freight and analysis the GST implication on ocean freight in the case of import transactions.

Different ways of importation and GST liability thereon-

Following are the two most popular ways of transportation of goods from one country to another country-

  1. Transportation by air route; and
  2. Transportation by sea route.

Sr. no. 19 of notification no. 12/2017-Central Tax (Rate) dated 28th June 2017 exempts services by way of transportation by air route from a place outside India to the customs station of clearance in India. Accordingly, no GST is payable in case the goods are imported through the air route.

Whereas, transportation of goods by sea route is taxable under GST. Further, serial no. 10 to notification no. 10/2017-Integrated Tax (Rate) dated 28th June 2017 held service receiver liable to pay tax under reverse charge mechanism (RCM) under the following situation-

  • Service provided is the transportation of goods by a vessel,
  • Service is provided by the person located in a non-taxable territory, and
  • Service is provided from a place outside India to the customs station of clearance in India.

Understanding terms like ‘ocean freight’, ‘CIF’ and ‘FOB’-

In simple terms, ocean freight represents the means of transportation of imported goods via sea route. Here, a large quantity of goods is loaded in a vessel and transported to the destination country.

Import transactions are generally carried on the following basis-

  1. Cost, Insurance and Freight (i.e., CIF) basis; or
  2. Free On Board (i.e., FOB) basis.

Please note in order to understand the GST implications, we will be understanding the terms CIF and FOB only to the extent of freight cost. Let us understand how the freight cost is borne in both the above basis-

  1. Under a CIF basis, the seller bears the cost of the freight necessary to bring the goods to the port of destination.
  2. Under an FOB basis, the buyer bears all the freight costs.

Import of services vis-à-vis ocean freight-

The term import of services is defined under section 2(11) of the Integrated Goods and Services Tax Act, 2017. Accordingly, import of services means and covers the supply of any service, when-

  • The supplier of the service is located outside India (i.e., in the non-taxable territory),
  • The receiver of the service is located in India (i.e., in the taxable territory), and
  • The place of supply of service is in India.

Hence, ocean freight expense qualifies within the ambit of the term ‘import of services’. Now, let us look into the GST applicability of the same which is explained in the below paras.

GST applicability on ocean freight on import transactions-

We need to analyze the GST applicability on both CIF and FOB basis-

  1. Import under CIF basis-
  • As seen above, under a CIF basis the freight is borne by the seller and not the importer. Here, the supplier will be the service receiver and not the importer.
  • Hence, it can be concluded that the importer is not liable to pay GST under reverse charge on such ocean freight expense, since the importer is not the service receiver.
  • Recently, the Gujarat Hight Court in the similar matter of Mohit Minerals Pvt. Ltd. Vs. Union of India & Others has held as under-
    • In the case of CIF contracts, the transportation contract is entered by the seller and not the buyer. Accordingly, the buyer (i.e., importer) is not the recipient of the service.
    • Hence it was held that IGST on such ocean freight is not leviable.  
  1. Import under FOB basis-
  • Freight is borne by the importer. Accordingly, the importer will be the service receiver and the shipping company will be the service provider.
  • Now, we will have to analyze the location of the shipping company. If the shipping company is located in the taxable territory, then, GST will be payable by the shipping company under forward charge.
  • However, if the shipping company is located in a non-taxable territory. Then, in terms of serial no. 10 to notification no. 10/2017-Integrated Tax (Rate) dated 28th June 2017, GST will be payable by the importer under reverse charge mechanism (RCM).

Synopsis-

The synopsis of the entire article is explained in the table below-

Type of transactions

GST liability thereon

When the payment is done on a CIF basis and the shipping company is based in India

GST will be payable by the shipping company under forward charge.

When the payment is done on a CIF basis and the shipping company is based outside India

GST is not payable since the importer is not the receiver of the service. The view is also supported by the decision of the Gujarat High Court.

When the payment is done on an FOB basis and the shipping company is based in India

GST will be payable by the shipping company under forward charge.

When the payment is done on an FOB basis and the shipping company is based outside India

GST will be payable by the importer under Reverse Charge Mechanism (RCM).

 

Notification No.10/2017 - IT(R)
Notification No.12/2017 - CT(R)

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Author:

CA Poonam Gandhi


Jul 19, 2021

Comments


Very very knowledgeable n well explained
By: Umesh Pandey | Dt: Jul 20, 2021
The judgment passed by Gujarat H.C in the matter of Mohit Minerals was passed on Jan'2020 and it is not a recent judgement. This judgment is known to importers and departmental officers
By: Soumitra Sen | Dt: Jul 21, 2021
Very good presentation
By: Vinayak Dattatraya Bakre | Dt: Jul 21, 2021


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