The Goods and Service Tax (GST) freight exemption notification that expired on September 30, 2022, has not been extended and industry sources warn that this will have a huge impact on airlines, shipping lines and freight forwarders and the industry.
In a trade notice, KLM and Airfrance said that the validity of GST exemption on services by way of transportation of goods by an aircraft from Customs station of clearance in India to a place outside India was extended up to September 30 in the 45th meeting of the GST Council. However, there is no information regarding the extension of exemption as yet, so such services will be liable to 18 per cent GST from October 1. Similarly, DHL put out a notification saying the transportation of goods by vessels will attract a GST of 5 per cent from Saturday.
Not extending the GST freight exemption will have a huge impact on the air freight trade. Ideally, export freight and freight forwarding should have been zero-rated, as is prevalent in most countries. India levied GST on it when it was introduced. After many rounds of representation by the trade at the Council, it brought an exemption through zero rating which was ideal, said K Vaitheeswaran Advocates & Tax Consultants, and an expert on GST.
The move will have a multi-pronged impact. It will affect the cash flows of freight forwarders as they have to pay upfront GST to airlines and shipping lines. It will also increase the freight cost for the exporter and create cash flow pressures. There will be an accumulation of Input Tax Credit as refunds are not easy and freight forwarders located outside India would have more to gain, he told businessline.
Earlier, the GST freight exemption was provided till September 2020, and extended by another two years. As in the past several years, the trade was expecting a further extension of this exemption. However, there is no information as yet, said J Krishnan, an official of a leading air freight forwarding company.
Will strain cash flow
“At a time when the Centre has launched the National Logistics Policy with the motive of reducing the logistics cost, the non-issuance of the GST freight exemption will increase the logistics cost,” he said. “This will strain the working cash flow of the exporters who are yet to fully recover from the pandemic downturn and lack of robust international demand on traditional export products,” he added.
While the Commerce Ministry wants every district to identify and promote export of at least one product the withdrawal of this exemption will pose financial challenges, especially to the SME segment as many of them are cottage industries or below the threshold limits. Even for those who have registered their GST this increases their compliance cost, he said.
Echoing a similar view, Afzal Malbarwala, President, The Air Cargo Agents Association of India, said “This will definitely affect the community and exporters. The cash flow will be the biggest hurdle. The government wants to promote exports and launched the NLP, which was accepted by all and now this is a big blow.”
Shanmugham, a garment exporter in Tiruppur said, “The entire textile industry is reeling from a grave situation due to recession and the Ukraine war. Any added cost would be an additional burden on the industries for its existence. The exemption needs to be extended.”
Dr. Ajay Sahai, Director General & CEO, FIEO, expects the notification extending GST exemption on export freight will be issued soon. The issue of GST on overseas freight may be getting deliberated as IGST on imports was recently struck down by the Apex Court.
Since freight rates have increased abnormally in the last two years, the levy of 18 per cent GST will further squeeze the liquidity of exporters.
Until the GST exemption on exports is notified, exporters should pay it and take a refund through the ITC or IGST route, Sahai said.