By Sumeet Mehta
With the advent of Goods and Service Tax regime, excise duty, service tax, and state VATs were subsumed in one single law: the GST. This revolutionary reform in taxation has brought about a great ease in compliance in the business community.
However, at the same time, it has also brought about some complications and also instances of incidence of double taxation. One of such glaring examples is incidence of double taxation on ocean freight paid by importers.
Starting with explaining the background of what this whole issue is. When an importer imports goods, he/she had to pay countervailing duty on landed cost of goods. For the uninitiated, countervailing duty was excise duty levied on imports.
The said countervailing duty on the goods was levied at the same rate as excise duty. In other words, Excise Duty charged on imports is called Countervailing Duty. Landed cost of the goods means the CIF value of imports, which is a sum total of FOB cost of goods imported, Insurance, and Freight.
In 2017, before GST was introduced, Service Tax Department came up with a reverse charge on ocean freight. Ocean freight was paid either by importers or their foreign vendors to foreign shipping agents for transporting goods from exporting country to importing country.
Reverse Charge is a mechanism by which government collects tax from buyers of goods and service, when the supplier of goods and service are not registered in India or not charging tax in India.
This mechanism was introduced by the government to ensure that in case the supplier is not charging tax then the buyer has to pay tax on to government on purchase of goods and service. This was a method to stop leakage of tax and augment tax base and collection.
By virtue of a circular, Service Tax was levied on ocean freight paid to any foreign shipping agent on goods imported in India.
This can be explained with a numerical example for clarity and better understanding.
Say, an importer imports goods whose FOB value is Rs 1,000, and paid Insurance and Freight of Rs 50 and Rs 100, respectively. Sum total of these three is the CIF value of Rs 1,150. In this case, importer has to pay Countervailing Duty (CVD) on Rs 1,150.
If the excise duty rate on goods imported is 10% then the importer has to pay Rs 115 as countervailing duty. At the same time, the importer has to separately pay Service Tax on ocean freight of Rs 100.
The Service Tax was 15% and that was chargeable on ocean freight of Rs 100 which means that importer has to pay other Rs 15 as Service Tax. This aggregates to a total of Rs 130 as total tax payable by the importer.
In other words, ocean freight paid to transport goods into India was taxed twice. First, under Excise Law as per rates prescribed on the goods imported. Secondly, under Service Tax Law. This tantamounts to double taxation. As per tenets of taxation, double taxation is not allowable.
However, then taxes were levied under different laws – Excise and Service Tax. With the advent of GST Regime and subsuming of Excise and Service Tax in GST, this matter became more visible and explicit because now the same thing (ocean freight) was taxed twice under the same law.
Now even Gujarat High Court has granted a stay to importers on payment of GST under reverse charge mechanism on ocean freight, in Mohit Minerals Pvt. Ltd v/s Union Of India case.
This judgment is path-breaking because it attempts to correct the law and stop the incidence of double taxation on the same event – payment of ocean freight.
GST Council needs to urgently and seriously deliberate on this issue of double taxation on ocean freight and resolve the same. As per tenets of taxation government cannot tax a same thing twice.
In the past many trade associations and bodies have made a representation to the GST Council on removal of this double taxation, but it has not been accepted by the GST Council. Now with the order of Hon. Gujarat High Court, removal of reverse charge on ocean freight has a more stronger reason arising from legal validity of taxing the amount twice.
It would be advisable for GST Council to remove ocean freight from levy of GST under reverse charge and eliminate double taxation and also ease compliance.
Sumeet Mehta is a Chartered Accountant and Financial Consultant, author of ‘Diagnosing GST for Doctors, published by CNBC Books18 and commentator on economic and financial matters. He tweets from @sumeetnmehta