GST UPDATE ON LEVY OF IGST ON OCEAN FREIGHT UNDER RCM PART-1

GST UPDATE ON LEVY OF IGST ON OCEAN FREIGHT UNDER RCM PART-1

The issue regarding levy of tax on ocean freight has been a matter of dispute since its inception in the service tax era and the legacy has been continued in the GST regime too. At the initial stages of implementation of GST regime, various Advance Rulings were being filed regarding levy of IGST on the ocean freight under reverse charge mechanism by the importer on mainly two grounds-one being the double taxation and the other being that importer is not recipient of service. The present update seeks to discuss the viability of the first ground being the issue of double taxation.

It is worth noting that the Authority for Advance Ruling Madhya Pradesh in the case of EDP Marketing Pvt. Ltd. vide Order No. 05/2019 dated 02.05.2019 and the Authority for Advance Ruling Karnataka in the case of M/s M. K. Agro Tech Pvt. Ltd. have consistently held that IGST is payable on the ocean freight by the importer under reverse charge mechanism under reverse charge mechanism and there is no double taxation. Let us examine the contention made by the assessee regarding double taxation in case of levy of IGST on ocean freight.

The submission of the assessee is that since the imported goods suffer IGST on the entire value including ocean freight element, if any, levy of IGST again on ocean freight by treating it as imported service under reverse charge mechanism by the importer is totally wrong and unjust. It is being contended that the concept of ‘composite supply’ comes into picture due to which levy of IGST again on the deemed value of ocean freight is not at all tenable. In our opinion, the above contention is not sound legally on merits. This is for the reason that in case of domestic sales made on “Free on Receipt” terms, GST is being levied on the freight element twice. Firstly, the freight amount is being included in the total value of consideration on which CGST/SGST/IGST is being paid by the supplier and secondly, GST is once again paid on the freight amount paid to the transporter under reverse charge mechanism by the said supplier of goods. Consequently, in case of domestic transactions also, the concept of “composite supply” is applicable but inspite of that, GST is being paid twice on the freight element if the terms of delivery are “Free on Receipt” basis. Therefore, in our opinion, the contention regarding double taxation for non-levy of IGST on ocean freight by importer under reverse charge mechanism in case of import of goods is not strong on merits.
This can be understood by an example. Suppose, we supply material to a buyer valued at Rs. 1,00,000 andRs. 1,000/- is paid for transportation in domestic Indian market. We pay the GST under reverse charge on transportation charges and take the credit. But while paying the invoicing the goods, we once again include the transportation charges in value of goods and pay the GST on 1,01,000/-. Hence, in both the transaction, we pay GST on transportation charges. But first transaction is between transporter and supplier for supply of services of transportation. The second transaction is between supplier and buyer for supply of goods. Hence, both transactions are separate. Similarly, the GST paid on ocean freight is transaction of service and other transaction is of goods. Hence, the defence put forward is not tenable as per opinion of authors of this update.

The other ground regarding importer not being recipient of goods will be discussed and analysed in our next update.

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GST UPDATE ON LEVY OF IGST ON OCEAN FREIGHT UNDER RCM PART-1

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