GST UPDATE No 196 ON REPERCUSSIONS OF SC DECISION QUASHING LEVY OF GST ON OCEAN FREIGHT

In our previous update we had discussed the reasoning adopted by the Hon’ble Supreme Court wherein it was concluded that the transaction of service element of transportation of goods by foreign shipping line engaged by foreign exporter in CIF contract of sale of goods is composite supply under section 2(30) of the CGST Act, 2017 which is liable to tax as principal supply as per provision contained in section 8 of the CGST Act, 2017. It was also held that although as per section 7(3) of the CGST Act, 2017, the Central Government has the power to notify an import of goods as import of services and vice-versa; there is no such power to interpret composite supply of goods and services as two segregable supply of goods and supply of services. Hence, the Supreme Court agreed with the view of the Gujarat High Court that a tax on supply of a service which has already been included by the legislation as a tax on the composite supply of goods cannot be allowed by treating the transaction of sale of goods and ocean freight as separate. The repercussions of this decision are the subject matter of discussion of our present update. The analogy adopted by the Apex Court appears to distort the concept of taxation at multiple stages under GST law to facilitate formation of a valid input tax credit chain. There are numerous transactions wherein the GST is being levied more than once on the premise that the input tax credit is anyways available to the recipient. To illustrate- A Chartered Accountant providing representational services to a client claims various out of pocket expenses incurred such as accommodation services, travelling cost etc. on which GST is already being paid by the service provider. The Chartered Accountant while raising bill to its clients includes such charges as a part of composite supply and charges GST @18% as applicable on consultancy services inspite of the fact that the expenses incurred might have suffered lower GST rate of 12% or 5%. However, it is settled principle that the Chartered Accountant will avail the input tax credit of the tax so paid to the CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??5 service providers and will charge GST @18% from its clients which is the basic framework of the GST regime. However, if the ratio of the above cited judgment is applied, it may lead to absurd results as the chartered accountant may plead that since the tax on such charges is being levied as a part of the composite supply, the said charges cannot be subject to levy of GST by the service provider of accommodation services/travelling expenses. Similarly, in case of domestic supplies wherein transportation charges are included in the value of taxable supply of goods, the assessee may contend that they are not liable to pay GST under reverse charge mechanism on the transportation charges paid to the GTA service provider as the said transportation charges are inevitable part of the composite supply of goods and cannot be taxed separately. However, it is pertinent to mention that the practically, the assessees are paying GST on the transportation charges at the GST rate applicable to the products in case of composite supplies and are also paying GST under reverse charge mechanism on the transportation charges. It is different matter that input tax credit of the tax paid under reverse charge mechanism on the transportation charges is admissible to the assessee. In our opinion, if the ratio of the Supreme Court decision is made applicable, then assessees may contend that GST will not be leviable separately on all the supply of goods and services which are part of the composite supply which definitely does not appear to be the intention of the legislature. It is submitted that although the decision is a boon to the assessees as it seeks to quash the levy of GST on ocean freight which is revenue neutral situation but at the same time, the reasoning adopted may lead to chaos with respect to normal transactions as discussed above. There is high probability that the judgment will be reviewed.

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GST UPDATE No 196 ON REPERCUSSIONS OF SC DECISION QUASHING LEVY OF GST ON OCEAN FREIGHT

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