The SC ruling should serve as a catalyst for the GST Board to revise all legacy circulars and rules and remove all anomalies from the law, making compliance simple and taxpayer-friendly, while upholding the basic principle of law. and the canons of taxation.
End of double taxation on sea freight. Reuters
With the advent of the Goods and Services Tax (GST) system, the excise, service tax and state VAT were consolidated into one law, namely the GST. This revolutionary tax reform has made compliance much easier in the business community. However, at the same time, this has led to complications and cases of double taxation. A glaring example was double taxation on ocean freight paid by importers.
We must begin by explaining the context of this whole question. When an importer imports goods, he must pay countervailing duties on the landed cost of the goods. For the uninitiated, the countervailing duty was an excise duty levied on imports. This countervailing duty on goods was levied at the same rate as the excise duty. In other words, excise duties levied on imports are called countervailing duties. The landed cost of goods refers to the CIF value of imports, which is the sum total of the FOB cost of the imported goods, insurance and freight.
In 2017, before the introduction of the GST, the Service Tax Department offered a reverse charge on ocean freight. Ocean freight was paid either by importers or by their foreign suppliers to foreign shipping agents for transporting goods from the exporting country to the importing country. Reverse charge is a mechanism by which the government collects tax from the purchasers of goods and services when the supplier of goods and services is not registered in India or does not charge tax in India. This mechanism was introduced by the government to ensure that if the supplier does not charge tax, the buyer must pay the tax to the government on the purchase of goods and services. It was a method to stop tax leakage and increase the tax base and collection. Under a circular, a service tax was levied on ocean freight paid to any foreign shipping agent on goods imported into India.
This can be explained with a numerical example for clarity and better understanding. Suppose an importer imports goods with an FOB value of Rs 1,000 and pays insurance and freight of Rs 50 and Rs 100 respectively. The sum total of these three is the CIF value of Rs 1,150. In this case, the importer has to pay countervailing duty (CVD) on Rs 1,150. If the rate of excise duty on the imported goods is 10%, the importer has to pay Rs 115 as countervailing duty. At the same time, the importer has to pay a sea freight service tax of Rs 100 separately. The service tax was 15% and was chargeable on the sea freight of Rs 100, which means the importer has to pay extra Rs 15 as a service. tax. This represents a total of Rs 130 as total tax to be paid by the importer. After the GST laws were enacted, instead of the service tax, the importer had to pay 5% GST on ocean freight.
In other words, ocean freight paid to transport goods to India was taxed twice. The first time under the Excise Act at the prescribed rates on imported goods and the second time under the Service Tax Act at a rate of 18% on the amount paid as freight shipping in the pre-GST regime. Thus the same expense was subject to double taxation. According to the principles of taxation, double taxation is not allowed. However, the taxes were then levied under different laws – the excise tax and the service tax.
With the advent of the GST system and the inclusion of excise tax and service tax in the GST, this issue became more visible and explicit as now the same thing (sea freight) was taxed twice under the same law. The first time at the prescribed rates on imported goods, and the second time under the reverse charge mechanism at a rate of 5% on the amount paid for ocean freight.
In January 2020, the Gujarat High Court granted importers a stay of GST payment under the Ocean Freight Reverse Charge Scheme, in Case of Mohit Minerals Pvt Ltd v Indian Union. This judgment was groundbreaking as it attempted to correct the legal anomaly and put an end to incidents of double taxation on the same event – the payment of ocean freight.
Ideally, the GST Council should have urgently addressed this issue of double taxation of ocean freight and seriously deliberated on it, and resolved the same. According to the principles of taxation, a government cannot tax the same thing twice. Many professional associations and organizations had made representations to the GST Board for the elimination of this double taxation, but no action has been taken on this subject.
Now the Supreme Court has upheld the order of the Gujarat High Court in the Case of Mohit Minerals Pvt Ltd v Indian Union, and ending double taxation of ocean freight by charging IGST on reverse charge of ocean freight. This is a pioneering judgment aimed at removing anomalies in the law, created by delegated legislation in the form of circulars, etc.
Hopefully, this judgment will serve as a catalyst for the GST Board to revise all legacy circulars and rules and remove all anomalies from the law, making compliance simple and taxpayer-friendly, while upholding the basic principle of law and the canons of taxation. The GST Council should take note of this and instruct the legal and technical teams in the GST department to look into this issue and suggest changes that the GST Council should take up.
The author is a chartered accountant and corporate finance professional, is the author of ‘Diagnosing GST for Physicians’. He tweets from @sumeetnmehta. The opinions expressed are personal.