Talking Point. Headwinds for the shipping industry

Come June and one thing that will turn expensive is transportation of goods into the country via the sea. Budget 2016 has brought inbound ocean freight under the service tax net.

Earlier, inward transportation of goods by an aircraft or vessel from a place outside India up to the customs station of clearance was part of the negative list of services; that is, it was exempt from service tax. Budget 2016 removed it from the negative list.

As a consequence, service tax will be payable on inbound ocean freight, albeit on 30 per cent of the value and the service provider may avail credit of input service.It is important to note that inbound airfreight, though excluded in the negative list of services, will continue to be exempt from the levy. The Budget amendment also clarifies that the service tax paid on inward ocean freight should not be part of the transaction value on which customs duty has been paid by an importer. The levy will be applicable from June 1, 2016.

Collectively, these changes will have a significant impact on importers and shipping lines. Compliance to this change will require the taxpayer to think through the interplay of Place of Provision Rules, terms of freight contract, determining the value of the freight component in cases of bundled services being rendered by the freight forwarder wherein break-up of freight is not reflected separately.

Also, there is the issue of taxing the same freight amount twice — at the time of charging service tax on the inbound ocean freight amount, though with an abatement of 70 per cent, and at the time of charging customs duty on the freight value by including the same in the value of the imported good. This can be seen as an aggressive tax positioning by the Indian government when it is trying to convince the global community of its intent to improve the ease of doing business.

Independently, the airfreight industry needs to be watchful — will the current exemption from service tax on inbound air freight continue in future? It is likely that due to the imminent implementation of the goods and services tax, or for any other reason, the government may withdraw the exemption on inbound airfreight.

From an equity and fairness perspective, if the government is of the view that inbound freight should be subject to service tax, it should actively consider dispensing with levying customs duty on the freight component. The policy of charging customs duty is anchored in history, when service tax was not in vogue. The world has moved forward since then and the contribution of the services sector to the economy has become significant. Service tax as a levy has established itself.

It can well be expected from the government to move towards progressive rationalisation of the tax policy, thereby exempting all services — including freight, insurance, royalty, licence fee — from Customs duty. Such a change could be made conditional upon the importer producing evidence of payment of service tax on the freight amount. Strengthening mutual exclusion of customs duty and service tax on the services component of international trade transactions would help in simplification — reducing litigation, especially around royalty, licence fee, etc, and demonstrating the firm commitment of the government towards improving India’s ranking in the Ease of Doing Business Index.

In its current form, the proposed change in service tax levy presents a headwind for the domestic shipping industry, increases compliance burden for inbound international trade and adds another levy on the inbound international freight cost. The industry expects a balanced approach and rationalisation of multiple levies.

The writer is Partner, BMR & Associates. Abhinay Kapoor, Assistant Manager, has also contributed to the article.

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