The issue at hand involves the imposition of Integrated Goods and Services Tax (IGST) on ocean freight services under the Reverse Charge Mechanism (RCM) in India. The Indian importer was required to discharge IGST on the freight services according to NN 8/2017 Integrated Tax (Rate) and NN 10/2017-Integrated Tax (Rate). This was a change from the previous exemption on service tax on ocean freight under Entry 34 of NN 25/2012-Service Tax, which was withdrawn by NN 01/2017- Service Tax. The GST regime under NN 8/2017- Integrated Tax (Rate) imposed a 5% tax rate on the supply of specified services, including transportation of goods by a vessel from a foreign place to the customs station of clearance in India. The recipient of these services was classified as the importer under section 2(26) of the Customs Act.
However, a writ petition was filed before the Hon’ble Gujarat High Court challenging the validity of the aforementioned notifications under the GST Laws. The High Court struck down the notifications, and the Union of India has filed a petition before the Hon’ble Supreme Court in response. The Supreme Court will now have to make a ruling on the matter and determine the legality of the notifications and the imposition of IGST on ocean freight services under RCM in India.
Submissions by the Revenue
The revenue’s submissions in the case focus on two main arguments:
- Disparity between Indian and foreign shipping lines: The revenue argues that the notifications were issued to remove the disparity between Indian and foreign shipping lines. Indian shipping lines are unable to claim Input Tax Credit (ITC) of GST paid as part of their transportation costs, as the supply of goods is currently exempt from taxation. By imposing tax on ocean freight, the revenue aims to level the playing field for Indian and foreign shipping lines.
- Availability of Input Tax Credit (ITC): The revenue argues that the tax on ocean freight will not increase the cost of the importer as ITC for the GST paid under the Reverse Charge Mechanism is available. This means that the importer can claim a credit for the GST paid on the ocean freight and offset it against their own tax liabilities.
- Co-operative federalism: The revenue also highlights the principle of “co-operative federalism” which binds the recommendations of the GST Council. The council’s recommendations have been given effect to by the government and the revenue argues that the notifications should be considered in this context.
Submissions by the Assessee:
The submissions by the assessee seem to focus on the issue of double taxation, as the ocean freight has already been included in the transaction value for the purposes of customs duties and IGST under the Tariff Act. The assessee argues that the imposer of IGST on the freight services under RCM would amount to double taxation and that the importer should not be considered the recipient of the service, as the supply of transportation of goods is by a foreign shipping line in a non-taxable territory to an exporter in a non-taxable territory and outside the territory of India.
The assessee also argues that the GST Council’s recommendations are only recommendatory and cannot be implemented in a manner that is ultra vires the parent legislation. They also point out that the section 5(3) of the IGST Act enables the government to stipulate the categories of supply and not specify a third-party as the recipient of the supply.
The assessee’s submissions challenge the rationale behind the notifications issued by the Central Government to impose IGST on ocean freight services and question the legality of the notifications in light of the relevant provisions of the GST laws.
Observation of Court
This passage refers to a decision by the Hon’ble Supreme Court of India regarding the recommendations of the Goods and Services Tax (GST) Council and their binding nature on the Parliament and State Legislatures. The court held that such compulsion would go against the principle of fiscal federalism. However, the Central and State Governments are bound to follow the recommendations of the GST Council while making rules under the provisions of the CGST Act and IGST Act.
The court also discussed the issue of tax collection on the “service” aspect of a transaction under the Reverse Charge Mechanism (RCM) and held that it violated the principle of “composite supply.” The court ruled that the supply of a service, which has already been included in the legislation as a tax on the composite supply of goods, cannot be taxed again.
The court also addressed the validity of notifications issued under the IGST Act and the definition of “reverse charge” under the IGST Act and CGST Act. The court ruled that the import of goods by a CIF contract constitutes an inter-State supply and can be subject to IGST, with the importer of the goods being the recipient of the shipping service. The court also held that the government’s notification specifying the recipient of the reverse charge is only clarificatory and did not change the recipient prescribed in the IGST Act. The court concluded that the Central Government has the power to specify a class of registered persons as the recipients of reverse charge under section 5(4) of the IGST Act.
The Indian importer is required to pay the Integrated Goods and Services Tax (IGST) at the time of import on the composite supply that includes both the supply of goods and services, such as transportation and insurance, in a Cost, Insurance, and Freight (CIF) contract. However, if there were to be a separate tax imposed on the importer for the supply of these services by the shipping line, it would be in violation of Section 8 of the Central Goods and Services Tax (CGST) Act.