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IGST levied on ocean freight transportation held unconstitutional

  • Mar 19, 2020 | Viren Shah

In 2017, the Ministry of Finance had imposed service tax on a reverse charge basis on ocean freight incurred by an importer. This tax was payable even if the importer did not directly pay the ocean freight charges to the shipping company/freight forwarder. This proposition has been continued into the GST regime as well.

The GST law specifically provides that the importers are required to discharge IGST at 5% on ocean freight charges under the reverse charge mechanism. However, at the same time, customs duty on the CIF value (which includes the freight component as well) of the goods imported into India is also paid by the importer. As a result, there is double taxation on the ocean freight under GST law, which is an impediment and has bloated the cost of imports.

Recently, in a landmark ruling, the Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. & Ors. Vs. Union of India & Ors. [TS-29-HC-2020(GUJ)-NT], has held that no tax is leviable on the ocean freight for services provided by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.

In this case, the taxpayer was engaged in the business of importing coal from various countries. It discharges the customs duty at the time of import on the assessable value as determined under Section 14 of the Customs Act, 1962. The value also includes ocean freight.

In addition to the levy of customs duty and IGST  at the time of import, the taxpayer (as an importer) was also required to pay IGST on ocean freight, leading to double taxation on the ocean freight amount. 

The taxpayers, being aggrieved by the fact that ocean freight is being taxed twice, had filed various writ petitions before the Gujarat High Court seeking quashing of the notifications mentioned above, by declaring that the same is ultra-vires the IGST Act, 2017.

The taxpayers challenged the levy before the Gujarat High Court by inter-alia arguing that there was:

  • The provisions contained in the IGST Act apply only for supplies made within the taxable territory. In the case of ocean freight, since both the service providers (i.e., shipping company and exporter) are located outside India, IGST cannot be levied.
  • Since IGST was paid at the time of import on total assessable value (which includes ocean freight), the notifications requiring the importer to once again pay IGST on the same component tantamount to double taxation and thus it is unconstitutional.
  • Under Section 5(3) of the IGST Act, the liability to pay tax can be shifted from the provider of supply to the recipient on a reverse charge basis. However, as per Entry 10 of Notification No. 10 / 2017, the liability has been shifted on the importer and not on the recipient, and thus entry is ultra-vires to Section 5(3).

After considering the various provisions/rule of GST law, the High Court observed as under:

  • Section 5(3) by the IGST Act, which deals with the discharge of tax by the recipient under reverse charge on supplies, does not include a person who is not the recipient of the supply. The taxpayer (as the importer), when not being the recipient of ocean freight services, cannot be made liable to pay tax under the IGST Act.
  • Ocean freight services provided by a person in non-taxable territory to another person in a non-taxable territory are neither an inter-state supply nor an intra-state supply. Such service is not covered under the scope of the IGST Act, and therefore, cannot be taxed without the authority of law.
  • A supply where both suppliers and recipients are outside India can be made leviable to tax only under Section 7(5)(c) of the IGST Act provided that the supply is in the taxable territory.
  • The entire supply has taken place outside the taxable territory, i.e., outside India, as both the service provider and service recipient are located outside India. The IGST Act does not sanction extraterritorial jurisdiction, and the mere fact that the transportation of goods terminates in India does not mean that the supply has taken place in India.
  • IGST cannot be imposed on the same freight amount by treating it as a supply of service since freight also suffers IGST as a part of the assessable value of imported goods. This is necessary to avoid the vice of double taxation.
  • The notifications mentioned above, being subordinate legislation, which acts as to deem the importer to be liable to pay tax under reverse charge, are ultra-vires the provisions of the IGST Act. Consequently, the imposition of IGST on ocean freight and deeming the importer as the person liable to pay tax are unconstitutional, given that there is no statutory sanction for levy and collection of such tax.

Based on the above, the High Court held that no tax is leviable under the IGST Act on ocean freight for the services provided by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. Moreover, the notifications mentioned above are declared ultra-vires the IGST Act, as they lack legislative competency. Hence, both the notifications are hereby declared to be unconstitutional. 

The High Court has analyzed the dispute relating to ocean freight from the time it was introduced in the erstwhile service tax regime. However, it needs to be evaluated as to whether the said ruling can be applied in the case of FOB transaction.

This ruling is indeed a positive development and should come as a relief to importers at large; however, one can expect the order to be challenged before the Supreme Court. It will also be helpful to various taxpayers who have filed similar writ petitions before other High Courts.

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i Notification No. 8/2017 - Integrated Tax (Rate) and Entry 10 of Notification No. 10/2017 - Integrated Tax (Rate) dated 28 June 2017

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Viren Shah
Avalara Author Viren Shah
Viren Shah, a member of the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University, has experience of more than a decade in Corporate and International Taxation. He specializes in Domestic and International Taxation, with specific emphasis on cross border transactions and exchange control laws with respect to inbound and outbound investments. He has vast experience in advising companies across various industries.

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