Understanding The Applicability And Exemptions Of GST On Ocean Freight

Understanding IGST in Ocean Freight

The Integrated Goods and Services Tax (IGST), a fundamental aspect of India's Goods and Services Tax (GST) framework introduced in 2017, is a tax levied on the supply of goods and/or services in inter-state trade. 

It simplifies the taxation system by replacing multiple indirect taxes. This tax applies specifically to transactions involving the movement of goods across state borders.

IGST Historical Context

Historically, ocean freight services were among the various processes subject to taxation under IGST. This taxation practice originated with the introduction of GST and subsequent amendments to the tax structure. 

It meant that businesses involved in importing goods via sea routes were impacted by IGST on their ocean freight transactions.

Impact on Ocean Freight Services

Ocean freight plays a crucial role in international trade, facilitating the movement of goods across borders. Under the GST regime, ocean freight services were taxed under IGST, impacting businesses involved in importing goods via sea routes. 

However, recent exemptions issued by the Ministry of Finance have brought about significant changes in this taxation landscape.

Hold tight! We're diving deeper into how these changes are unfolding.

GST Exemption on Ocean Freight from October 2023

In 2017, the Ministry of Finance 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. 

Under the GST regime, importers were required to discharge IGST at 5% on ocean freight charges under the reverse charge mechanism. 

However, this led to double taxation as customs duty on the CIF value (which includes the freight component) of imported goods was also paid by the importer.

The recent exemption introduced by the Ministry of Finance brings significant relief to importers by exempting the 5% IGST levy previously imposed on ocean freight services. 

Effective from October 2023, this exemption aims to alleviate the financial burden on importers and streamline the import process.

Legal and industry background leading to the exemption

Recently, the Gujarat High Court ruled in the case of Mohit Minerals Pvt. Ltd. & Ors. Vs. Union of India & Ors. that no tax is leviable on ocean freight for services provided by a person located in a non-taxable territory. 

The court held that ocean freight services provided by a person in a non-taxable territory to another person in a non-taxable territory are not covered under the scope of the IGST Act and cannot be taxed without the authority of law. 

The High Court further stated that imposing IGST on the same freight amount as a supply of service, when it already suffers IGST as part of the assessable value of imported goods, would lead to double taxation.

Supreme Court's Influence on Exemption

On May 19, 2022, the Supreme Court upheld the decision of the Gujarat High Court in the Mohit Minerals case. 

The Supreme Court agreed with the High Court that a tax on the supply of a service, which has already been included by legislation as a tax on the composite supply of goods, cannot be allowed. 

This ruling reinforced the importance of preventing double taxation and ensuring clarity in taxation laws regarding ocean freight services.

Impact Analysis: Pros and Cons

Cost Savings for Importers:

Pros: Reduced expenses in overall import costs.

Cons: Potential impact on government revenue.

Streamlined Logistics and Inventory Management:

Pros: Simplification of tax calculations and documentation.

Cons: Possible implications for businesses and consumers.

‍

Adjusting to these pros and cons requires strategic planning and operational efficiency. Pazago's trade management and logistics services, including Pazago Fulfilled, are designed to help businesses optimize their operations and capitalize on cost savings.

Now, let's see what this means for your pocket and the broader market.

Pre and Post-GST Exemption Market Dynamics

For a clearer perspective on the impact of exempting ocean freight from IGST, let's explore a hypothetical comparative case study of importing goods before and after October 1, 2023:

Before the Exemption

• An importer procures goods from a supplier outside India.
• The goods undergo transportation via ocean freight to an Indian customs station.
• Alongside the goods' cost, the importer bears IGST on the ocean freight charges, following the previous tax regulations.
• The importer is obliged to compute, remit, and document the IGST on ocean freight based on the prevailing rates.

After the Exemption

• In the new tax framework, the importer maintains the practice of acquiring goods from an overseas supplier.
• The goods still undergo ocean freight transport to an Indian customs station.
• However, the importer is now exempted from settling IGST on the ocean freight charges.
• The paperwork and calculations concerning IGST on ocean freight are no longer necessary, streamlining the process for the importer.

Curious about how this plays out in real life? Let's break it down further.

Frequently Asked Questions (FAQs)

Does the exemption of ocean freight from IGST apply to all imported goods?

Yes, the exemption encompasses all goods imported via ocean freight, provided they adhere to the specified conditions outlined in the notification.

What are the implications for businesses engaged in ocean freight services?

Ocean freight service providers will no longer be obligated to impose and collect IGST on transportation charges for goods imported via sea. This alteration simplifies their tax responsibilities and may necessitate adjustments to their invoicing and billing procedures.

Will the exemption of IGST on ocean freight affect other import-related taxes and charges?

The exemption is specifically directed at IGST on ocean freight charges. Other applicable taxes, such as customs duty, will persist by existing regulations.

Can businesses seek a refund for IGST paid on ocean freight charges before October 1, 2023?

Refunds for IGST remitted on ocean freight charges before the exemption's implementation should adhere to the provisions delineated in the GST refund process. Our GST refund services offer guidance to businesses navigating the refund procedure.

Will the exemption of IGST on ocean freight influence the pricing of imported goods?

The exemption may indirectly impact the pricing of imported goods. Importers could potentially benefit from reduced costs owing to the elimination of IGST on ocean freight charges, potentially leading to enhanced competitiveness in pricing.

Conclusion

In conclusion, the removal of GST on ocean freight starting October 1, 2023, is a big win for international trade in India. This change, prompted by legal decisions, aims to make importing goods easier and cheaper. 

Importers will save money, making them more competitive globally. Though there are challenges like managing government revenue and handling refunds, overall, this move makes trade smoother and boosts India's global connections. Adapting to this change is key for businesses dealing with ocean freight.

As businesses adapt to the removal of GST on ocean freight, leveraging platforms like Pazago can provide the necessary tools and insights to manage changes effectively, save costs, and enhance global competitiveness.