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Applicability of Service Tax on Ocean Freight to Foreign Shipping Company

GST Expert
Author: CA Amlesh Gupta
Posted On: Friday 21 July 2017

Tags: Ocean Freight Shipping Company Foreign Shipping Company

Taxability on Ocean Freight

We have tried to cover below aspects in this article with regards to Ocean Freight:

  • Applicability of Service Tax on Ocean Freight to Foreign Shipping Company till 23rdApril, 2017 
  • 24thApril, 2017 onwards Such Liability shifted to Importers 
  • Taxability under GST Law

 The Government of India had made significant changes with effect from 22nd January, 2017 vide Notifications 1/2017-ST and 3/2017 dated 12th January, 2017 whereby if services are provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by vessel from a place outside India upto the customs station of clearance in India, the person liable to pay service tax is the person in India who complies with Sections 29, 30 or 38 read with Section 148 of the Customs Act, 1962 with respect to such goods.

 

Section 29: The person-in-charge of a vessel or an aircraft entering India shall not permit the vessel or aircraft to land at any place other than a customs port or a customs airport.

 

Section 30: The person-in-charge of a vessel carrying imported goods shall deliver an import manifest within 12 hours after its arrival to the proper officer.

 

Section 38: The person in charge of any conveyance carrying imported goods or export goods shall produce any document and provide answers to any questions as required by the proper officer.

The amendments created some degree of confusion on account of identifying the person liable; the quantum of service tax in the absence of availability of value of freight; CENVAT credit eligibility debate with reference to importers.

The confusion created due to above amendments has been resolved to a large extent by the new set of changes.

  Rule 2(1) of the Service Tax Rules, 1994 is being amended with effect from 23rd day of April, 2017 whereby if services are provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by vessel from a place outside India upto the customs station of clearance in India, the person liable to pay service tax is the importer as defined under Section 2 (26) of the Customs Act, 1962 of such goods.

  As per Section 2(26) of the Customs Act, “importer” in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner or any person holding himself out to be the importer.

  A corresponding amendment has been made to Notification No.30/2012 -ST dated 20 June 2012 whereby in such cases, service tax has to be discharged by importer of such goods under reverse charge mechanism.

In accordance with the Notification clarification issued by the board vide circular No. 206/04/2017-service tax dated 13.04.2017 wherein it clarify that there are two option available for payment of service tax liability. 

  1. Service tax @ 1.4% + Swachh Bharat Cess and Krishi Kalyan Cess each @0.05% of Custom Value of Goods shall be paid accordingly 

OR 

  1. Service tax @14% + Swachh Bharat Cess and Krishi Kalyan Cess each @0.05% of the value of the service i.e. Ocean Freight. 

 In other words, for the period 22 January 2017 to 22 April 2017, the person who is liable to pay service tax namely the person filing the Import General Manifest has an option of discharging service tax at an identified rate i.e. 1.5% of the CIF Value. The said option provided now would create demand of the refund amount pertaining to service tax where service tax paid under the normal provisions is more than the service tax payable as per the option given under Rule 6 of the Service Tax Rules, 1994 for the period between 22 January 2017 till 22 April, 2017. However, there is no clarification in the said regard and one may interpret that the option given under Rule 6 is only for those persons who have still not discharged the Service tax liability as on 22 April 2017 and not for the persons who had already discharged service tax. 

It is also pertinent to point out here that under Notification No. 26/2012-ST dated 20th June, 2012 (Sl. No. 10), there is an exemption on 70% of value of services of transportation of goods in a vessel subject to the fulfillment of the condition that CENVAT credit on inputs and capital goods used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. The effective rate being 4.5% of the freight amount. Therefore, the importer can either dis-charge service tax @ 1.5% of the CIF value or 4.5% of the Freight amount at his option. 

Considering condition in above mentioned notification, foreign shipping company is eligible to take abatement benefit of 70% as they are not availing any CENVAT credit on inputs and capital goods used to provide taxable service. However, Circular no. 206/4/2017- Service Tax dated 13th April, 2017 denies such benefit for foreign shipping company by giving following justification: 

“In case of foreign shipping lines, their services being exports from their home country, are zero-rated in their home country and thus have suffered no taxes. Further the foreign shipping lines do not get registered in India and do not follow the provisions of CENVAT Credit Rules. Thus, the condition for availing exemption under notification No. 26/2012-ST dated 20.06.2012 (Sl. No. 10) is not fulfilled by the foreign shipping lines. Hence, benefit of conditional exemption will not be available to them and service tax will be paid on full value of services.” 

With effect from 22 January 2017 by way of Notification No 14/2016-ST, Rule 8B has been inserted in Point of Taxation rules, 2011 where Point of taxation in case of services provided by a person located in non-taxable territory to a person in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, shall be the date of bill of lading of such goods in the vessel at the port of export. 

Conclusion: In case of foreign shipping lines, their services being exports from their home country, are zero-rated in their home country and thus have suffered no taxes. Further the foreign shipping lines do not get registered in India and do not follow the provisions of CENVAT Credit Rules. Thus, the condition for availing exemption under notification No. 26/2012-ST dated 20.06.2012 (Sl. No. 10) is not fulfilled by the foreign shipping lines. Hence, benefit of conditional exemption will not be available to them and service tax will be paid on full value of services.” 

Person Liable to Pay Service Tax:

Sr No.

Particulars

Before 22/01/2017

From 22/01/2017 to 23/04/2017

23/04/2017 onwards

1

Liability

Exempted – Mega Exemption Notification 25/2012-ST

 

Foreign Shipping Company

 

Importer

 

2

Rate

N.A.

15% of Freight Amount (based on Circular)

4.5% of Freight Amount or 1.5% of CIF value

 

 

 

 

 

 Analysis based on Facts and Case Laws

 We would like to highlight that the pre-requisite conditions for availing benefit of 70% Abatement are not to take CENVAT Credit on Inputs and Capital Goods. Since, Foreign Shipping Liner or its Shipping Agent is not registered in India, then there is no question of Availing CENVAT Credit. By analyzing this, Conditions for availing 70% abatement is fulfilled by such Shipping Agents. Hence, in our view shipping Agents are eligible for 70% abatement as they are fulfilling the condition for not availing CENVAT Credit.

 Further we would like to put the focus on Circular no. 206/04/2017 in which it is stated that abatement shall be available to Foreign Shipping Agents based on certain conditions as mentioned above. However, plain reading of Notification allows abatement of 70% to Foreign Shipping Company. Further one can say that Circular can not Override Notification based on Supreme Court Judgement i.e. Hon’ble Supreme Court in Union of India V/s Inter Continental (India) 2008 (226) ELT 16. In this case it was held that Department by issuing a circular subsequent to notification could not add new condition to the Notification thereby restricting the scope of exemption notification or whittling it down.

Hence, in our view and based on above analysis, abatement of 70% is eligible to Foreign Shipping Company and One can go into litigation to overlook the said Circular.

Scenario Under GST

As per Notifications 8/2017- Integrated Tax (Rate) and Notification No. 10/2017- Integrated Tax (Rate) dated 28th June, 2017,if Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the person liable to pay Goods &Service tax (GST) is the Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962).

Further the Rate of GST shall be 5% of Taxable Service i.e. Ocean Freight.

As per Corrigendum to Notification 8/2017 dated 30thJune, 2017, Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10% of the CIF value (sum of cost, insurance and freight) of imported goods.”;

In other Words, GST shall be 5% of Freight or 0.5% of CIF Value.

Please free to write to us on amlesh@apmh.in for any further queries on the above blog.

 

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