GST on Ocean Freight in case of Import of Goods

The two most popular means of transportation of the goods from one country to another are through sea routes and air routes. Now in case of import of goods, services provided for transportation through the above routes have different GST liability scenarios.

  • GST on transportation through air route is exempt &
  • GST on transportation through sea route is charged under reverse charge if the transportation service supplier is based out of India.
Ocean Freight

In a simple sense, it means transportation of imported goods through the sea route. Large quantities of goods are loaded in a vessel & transported to the destination country.

Import of Services

As per Section 2(11) of IGST Act 2017, It is the supply of any service where-

(i) The supplier of service is located outside the taxable area

(ii) The recipient of service is located in India, and

(iii) The place of supply of service is in India

Note that Ocean Freight expense is an “Import of Service”.

Reverse Charge Mechanism
  • Usually, the supplier of goods or services pays tax on supply. However, in the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.
  • As per Notification No. 13/2017-CT and 10/2017-IT dated 28-6-2017, If the supplier of service is located in a non-taxable territory & the recipient of services located in the taxable region, then the latter is liable to pay GST under RCM.
GST On Ocean Freight
“For services supplied by a person located in non-taxable territory by transportation of goods by a vessel from a place outside India up to the customs station of clearance in India”. As per the Notification, the importer would be liable to discharge GST liability on behalf of the exporter of service under the reverse charge mechanism.

In simple word, if an exporter transports the goods through a vessel from outside India to India, then Importer is liable to pay GST on transportation services, irrespective of the fact whether consideration for that service will be paid by Exporter or Importer. It is to be noted that here we are discussing GST on vessel/transportation services & not on Import of goods.

Based on Transaction value, the Ocean Freight Expense in respect of import of goods is mainly divided into two types, namely:

(1) Imports of goods on FOB Value  (2) Import of goods on CIF Value.

(1) Import of goods on FOB Value:

  • FOB stands for “free on board” and is a designation that is used to indicate when liability and ownership of goods is transferred from a seller to a buyer.
  • FOB origin means that the buyer/importer pays the shipping cost and gains ownership of the goods as soon as it leaves its point of origin.
  • Suppose the importer paid for goods on FOB basis and hired an ocean freight service provider, and makes the payment for such service. In such a case, the importer is the recipient of service as per the definition of ‘Recipient’.
  • Hence in case of FOB basis, if the ocean shipping line is located in non-taxable territory, GST is to be paid under RCM by the recipient of service, i.e. the importer.

(2) Imports of goods on CIF Value:

  • Cost, insurance, and freight (CIF) is an expense paid by a seller to cover the costs, insurance, and freight of a buyer’s order while it is in transit. The goods are exported to a port named in the sales contract. Until the goods are fully loaded onto a transport ship, the seller bears the costs of any loss or damage to the product.
  • He also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
  • The government has included ‘importer’ in the category recipient of services by entry no. 10 of Notification 10/2017. However, it must be noted that in the case of CIF transactions, the importer is not the person liable to pay freight to the shipping line and thus cannot be treated as the recipient of the service of a foreign shipping line.

Now the question arises whether the Notification can expand the scope of ‘service recipient’ when the section has empowered to levy a tax on the recipient? Several petitions were filed before the Gujarat High Court on the said issue. Entry No. 10 of Notification no. 10/2017) was challenged on the ground that it is ultra-virus of section 5 of the IGST Act.

The landmark ruling in the case of Mohit Minerals Vs. UOI & Others reported in 2020-TIOL-164-AHMDGST was pronounced. Gujarat High court in the said judgment, has held as follows: –

  • Entry No 10 of Notification no. 10/2017, is ultra-virus of section 5(3). The importer is not the recipient of services of transportation of goods. The exporter who is located outside has contracted with the shipping line, the recipient of service. Hence tax can’t be demanded from the importer. The importer cannot be considered as an indirect recipient of service, too, as ‘recipient of service’ is defined explicitly in the statute.
  • The importer cannot determine the value of services under section 15 of the GST Act. The value would be determined by the exporter of goods.
  • Entry No. 10 of Notification no. 10/2017 is unconstitutional as the tax on ocean freight services and making the importer pay GST is not constitutional as there is no statutory sanction.

As per the above, it may be concluded that no IGST is payable by the importer under Reverse Charge in the case of CIF transactions. The government has not yet clarified the situation by way of issuing notification. Hence, the above ruling applies wherein no GST is payable by the importer.

The above discussion can be summarized as follows:

(1) Payment on FOB basis:

  • If shipping line is based in India, GST payable by shipping company under forward charge.
  • If shipping line is based outside India, GST payable by Importer under RCM.

(2) Payment on CIF basis:

  • If shipping line is based in India, GST payable by shipping company under forward charge.
  • If shipping line is based outside India, NO GST payable as per Gujarat High Court decision.