IGST on ocean freight unconstitutional, says Gujarat HC

Shishir Sinha New Delhi | Updated on January 24, 2020

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In a relief to importers, the Gujarat High Court on Thursday declared Integrated Goods & Services Tax (IGST) on ocean freight as ‘unconstitutional’.

The Court was hearing a petition based on three elements ― one, first having paid the tax under IGST Act on the entire value of imports (inclusive of ocean freight), the petitioner cannot be asked to pay tax on the ocean freight all over again under a different notification.

Secondly, in case of Cost, Insurance and Freight (CIF) contracts, both the service provider and the service recipient are outside the territory of India. No tax on such service can be collected even on reverse charge mechanism (RCM).

And thirdly, in case of High Sea sales, the burden is on the petitioner as an importer, whereas, the petitioner is not the recipient of the service at all. It is the petitioner’s seller of goods on high sea basis who has received the services from the exporter/ transporter.

Now, the revenue authority is likely to approach the Supreme Court on this matter.

IGST is levied on all Inter-State supplies of goods and/or services. It is also applicable on any supply of goods and/or services in cases of import into and export from the country. Under the GST, there is specific provision with respect to taxability on the component of ocean freight. The law specifically provides that the importers are required to discharge IGST at the rate of 5 per cent on ocean freight services under the RCM. Under RCM, it is the duty of the importer to pay IGST on behalf of the foreign buyer.

However, at the same time, customs duty on the CIF value (which includes the component of freight as well) of the goods imported into India is also paid by the importer. As a result, there is double-taxation on the component of ocean freight under GST law which is an impediment and has bloated the cost of imports.

“The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation,” Abhishek A Rastogi, Partner at Khaitan & Co, said. He is arguing ocean freight petitions in several courts.

About the repercussions, he said that the Indian importer is no longer required to discharge tax under the RCM on the deemed value pertaining to the ocean freight. It is quite possible that the matter is not finally settled at this level but will finally be decided by the Supreme Court.

“If the matter is finally settled in favour of the taxpayer, then those importers who have large pools of credit due to different reasons, including exempted supplies, would end up saving substantial tax,” he said.

The petition said that the RCM notification, rate notification and corrigendum to the extent they seek to levy IGST on ocean freight on reverse charge basis violate Article 14 of the Constitution as these have been issued in an arbitrary manner which do not have any connect with the object sought to be achieved.

Published on January 24, 2020

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