GST UPDATE No 302 ON NON-EXTENSION OF EXEMPTION ON FREIGHT PAID ON EXPORT:-

The expiry of the exemption available to ocean freight and air freight paid on export of goods as on 30.09.2022 has been the talk of the town. Notification no. 02/2018-Integrated Tax (Rate) dated 25.01.2018 prescribed the exemptions till 30^th September, 2018 in relation to service by way of transportation of goods by aircraft or by a vessel from India to a place outside India. This exemption was further extended upto 30.09.2022 vide Notification No. 07/2021-Integrated Tax (Rate) dated 30.09.2021. However, the exemption has not been extended further so the trade and industry is concerned about the levy of GST on the said services. The analysis of the provisions in this regard is the subject matter of discussion of our present update.

The consequences of not extending the exemption to the freight paid on exports are that the taxpayers will have to pay IGST on the said transactions in view of the following provisions contained in CGST Act and IGST Act, 2017. In cases of exports, the service provider (shipping agency) and the service recipient (exporter) are located in India. As regards determination of place of supply is concerned, it is submitted that the provision contained in the proviso to section 12(8)(b) of the IGST Act, 2017 is relevant which reads as follows:-

(8) The place of supply of services by way of transportation of goods, including by mail or courier to, –
(a) a registered person, shall be the location of such person;
(b) a person other than a registered person, shall be the location at which such goods are handed over for their transportation.
Provided that where the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such goods.

It is further worth mentioning that the provisions contained in section 7(5) of the IGST Act, 2017 are also relevant for the purpose of determination of tax liability on freight paid on export of goods.
(5) Supply of goods or services or both,––
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

After analysing the above provisions, it is found that the service provider is located in India and the place of supply as stated above is outside India so the transaction is to be considered as inter-state supply of services. However, in the present case, the service recipient is also located in India. Now, the question that arises is that whether the above provision in section 7(5)(a) of the IGST Act, 2017 indicates export transactions or is also applicable for transactions where supplier and recipient both are located in India? As per section 16 of the IGST Act, 2017, meaning of zero-rated supply has been given which includes export of services as defined in section 2(6) of the IGST Act, 2017. It is submitted that when export of services are separately defined and are treated under zero rated supply, the provision contained in section 7(5)(a) of the IGST Act, 2017 cannot be considered to have been intended to indicate reference to export of goods or services. Therefore, the scope of the provision contained in section 7(5)(a) of the IGST Act, 2017 is very wide and it covers within its ambit the transactions where the service provider and service recipient are located in India with place of supply outside India. Hence, GST will be leviable on the ocean freight paid on exports @ 5% and also on the air freight @18% w.e.f. 01.10.2022.

It is worth mentioning that such transactions in negative list regime of service tax were not liable to service tax on the premise that when place of supply is outside India, the transaction is undertaken outside the taxable territory. There was no such concept of inter-state supplies but the provisions of GST law differ in this respect. Although, the GST law is applicable to whole of India and also defines the term “taxable territory” under section 2(109) of the CGST Act, 2017 as territory to which the

provisions of this Act apply. However, as detailed above that in view of the provision contained in section 7(5)(a) of the IGST Act, 2017, the transaction of freight paid on export is considered as inter state supply and there is no specific exemption prevailing after 01.10.2022, the said transaction would be liable to IGST. The contention that GST should not be levied as place of supply is outside India, being in non-taxable territory would not be feasible.

Now, another issue that arises is the admissibility of ITC to the service recipient, being the exporter. It is to be noted that the shipping agencies mention the place of supply as “Non Taxable Territory” in the invoice issued by them. Consequently, it is probable that the transaction reflected in GSTR-2B of the recipient will tag it under “ineligible ITC”. Although, in our opinion, the ITC of the IGST so paid on export freight should be available to the exporter as the intention of the government has always been to incentivize exports but often the admissibility of ITC is disputed by the revenue authorities on such grounds. The leading shipping agencies such as DHL Logistics Pvt. Ltd. have already issued advisory regarding levy of IGST on the export freight charged by them. The intention to tax such transactions is also fortified from the news being reported that the said exemption was being granted in the initial years due to difficulties faced by the exporters in claiming refunds from the government but as the refund mechanism has been streamlined, the government has not extended the exemption on export freight. It is hoped that the government issues a clear cut clarification on this issue in the interests of exporters.

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GST UPDATE No 302 ON NON-EXTENSION OF EXEMPTION ON FREIGHT PAID ON EXPORT:-

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