GST UPDATE ON TAX UNDER RCM ON OCEAN FREIGHT 102/2020-21

The shipping industry is a very important part in the case of Imports and Exports and transportation of goods through oceans covers more than 90% of the trade as it is affordable and efficient. 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. In this update we shall discuss the recent ruling pronounced by Andhra Pradesh AAR in case of M/s Indian Potash ltd.

The applicant seeks ruling on the following questions, a few out of which are being eagerly awaited by the industry

1. Whether the said transaction does qualify as import of service or not?

2. Whether their transaction will qualify as inter-state supply or not?

3. Whether the applicant can be deemed as the recipient of the service or the person liable to pay tax or not?

4. Whether the applicant is liable to pay tax under reverse charge mechanism or not?

5. Levy of IGST on ocean freight as a service, while levying Customs duties by including fright charges also in the value of imported goods, amounts to double taxation or not?

6. Exclusion of value of subsidy and levy of IGST on ocean freight are leading to accumulation of credit or not? and is it not against the spirit of GST law which is intended for eliminating the cascading effect?

Before we proceed further, we shall sneak a quick look at the conditions required to be satisfied so that GST is to be paid under RCM by importer (as per Notification no. 13/2017-Central tax (Rate) dated 28.06.2017).

1. Such transportation of goods is from a place outside up to customs station of clearance in India.

2. Supplier of services is the person located in non-taxable territory

3. ‘Recipient’ is the importer.

Coming to answering the questions by the authorities we shall be doing it question wise.

Ø Whether the transaction is import of service or not and it is inter-state supply or not

In order to determine whether a transaction is inter-state supply or not Section 7(4) is to be referred which reads as ‘supply of services imported into India shall be treated as Inter-state supply’. Further Section 7(5)(c) was being stated by the authority which says that ‘supply of goods or services or both in the taxable territory, not being an intra-State supply and not covered elsewhere in this section shall be inter-state supply’. Therefore, it was held by AAR that such transaction qualifies as import of service and it is inter-state supply.

Ø Whether the applicant can be deemed as the recipient of the service or not

Referring to the definition of ‘Recipient’ as specified in section 2(93) of CGST Act 2017, it was told that applicant has paid consideration for both supply of goods and also for service that is transport of the vessel. Therefore, the applicant is the recipient of both goods and services.

Ø Whether the applicant is liable to pay tax on the transaction referred under reverse charge mechanism or not

Referring to Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 and notification No. 8/2017-integrated Tax (Rate) dated 28.06.2017 it was held that no exemption is available from payment of IGST on ocean freight under RCM.

Moving on to the last two questions it has been answered by AAR that it is outside the scope of AAR.

It is worth mentioning that similar rulings were passed by Madhya Pradesh AAR in the case of M/s. EDP Marketing Pvt. Ltd. vide Order No. 05/2019 dated 02.05.2019 and Karnataka AAR 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. The rulings passed by AAR have been pronounced in favour of department as they are revenue neutral. But a moot question that arises here is whether these can override the decision passed by Hon’ble High Court of Gujarat in the case of MOHIT MINERALS PVT. LTD. VS UNION OF INDIA, wherein it has been held that the above mentioned notifications are ultra vires the provisions contained in IGST Act, 2017.

Now, it is settled position that the decision of High Court is binding on lower formation including AAR. Next question is whether the decision of one High Court is binding on other state? When there are contradictory decisions of various High Courts then the decision of jurisdictional High Court will prevail. But if there is only one decision of High Court although it is not of jurisdictional High Court and there is no other decision of any other High Court then it is binding all over India. But the Authority of Advance Ruling is taking decision against the verdict of High Court is not legally sustainable.

We have seen pro-revenue approach of Advance Rulings. So there is a quick need for the constitution of National Appellate Authority for Advance Ruling, representation for which has already being given to the council. Secondly, the judicial members should also be included in the AAR so that creditability of these authorities is not questioned time and again. Even there is view prevailing among advocates and Chartered Accountants dealing in GST that one should not approach AAR for clarification on already settled issues. They will also unsettle settled issues.

This is solely for educational purpose.

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GST UPDATE ON TAX UNDER RCM ON OCEAN FREIGHT 102/2020-21

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