In light of the recent amendments to the tax regime by the Indian Government, in imposing service tax on ocean freight for goods imported into India, there has been much uncertainty in the industry about the ramifications of these changes that came into effect on 22nd January, 2017. This article provides a brief overview of the new regime.
In this article, please note that the term ‘ocean freight’ is merely used as a colloquial phraseology. No distinction has been drawn between time and voyage charters in the taxing legislation and for the purposes of the Indian revenue authorities, it is immaterial whether freight or hire is paid for transportation of cargo into India, as long as consideration for a taxable service flows from the service receiver to the service provider, such consideration is liable to be taxed under the legislation.
Basis of Service Tax
Section 66B of the Finance Act, 1994 levies service tax on all services provided in India by one person to another for a consideration except for those services specified in the negative list under Section 66D and those specifically exempted under the ‘Mega Exemption Notification’ (No.25/2012-ST). The services provided by a vessel in lieu of transportation of goods from a place outside India up to the customs station of clearance in India was covered in the said negative list under Section 66D(p)(ii) and hence no service tax was levied. However, vide clause 146 of the Finance Bill 2016 the said entry in the negative was deleted and the said services were made taxable with effect from 1st June, 2016. As the situation stood then, services availed from foreign shipping line by a business entity located in India were to get taxed under the reverse charge mechanism at the hands of the business entity, i.e. the Indian Business Entity was required to make payment of the Service Tax on the Freight paid on behalf of the Carrier.
There was a scope of exclusion in cases where both service provider and service receiver were in a non-taxable territory. However, by way of Notification No. 1/2017-ST dated 12th January 2017 effective from 22nd January 2017, the above exemption notification was amended to the effect that no exemptions were to apply to “services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India”. Therefore, service tax became leviable on ocean freight even when both the service provider and service receiver are in a non-taxable territory.
Further by Notification No. 3/2017-ST (effective from 22nd January 2017), import ocean freight was added under the head of ‘taxable services’. The effect of these notifications read together with the provisions of the Customs Act 1962 is as follows:
- If the service provider is in a non-taxable territory and the service receiver is based in India, then the service receiver will be made liable to pay the service tax under a reverse charge mechanism. To take an example, if a ship-owner based in UK charters a vessel to an Indian Charterer, the liability to pay the service tax on freight would fall upon the Indian Charterer.
- If both the service provider and the service receiver are based in a non-taxable territory, then as of 23rd April 2017, the Service Tax is to be paid by the Indian Importer. For the brief period between 22nd January and 23rd April 2017, where the service provider and receiver are both abroad, the service tax was to be paid by the vessel’s agents in India. For example, if the Carrier is based in London and the vessel in on charter to a Singapore entity for a shipment into India, there is service tax applicable on the freight paid by the Singapore Charterer to the London Owners, which has to be paid by the Indian Importer if the Bill of Lading is dated post 23rd April 2017 at the load port.
The amended service tax regime applies to all shipments where the Bill of Lading is dated post 22nd January 2017 and is not retrospective in effect. The rate of such Service Tax applicable has recently been clarified to be 15% of the ocean freight when the vessel owner is a non-Indian entity and is not tax registered in India. If the Indian party to the transaction, whether Charterer or Importer, has not availed CENVAT credit for input goods, then the applicable rate of Service Tax is 4.5%. There is also an option provided for calculation of Service Tax, where a party may pay 1.5% of the CIF value of the goods being imported, instead of the 15% of the ocean freight. This option is available for any shipment where the Bill of Lading is dated post 22nd January 2017.
Transshipment via India
The Ministry of Finance vide Circular No. 204/2/2017-ST dated 16th February 2017 threw some light on the uncertainty surrounding the transportation of goods by a vessel from a place outside India to the customs station in India with respect to goods intended for transshipment to any country outside India. The implication of the same, in brief, is that Service Tax will not be levied on such transactions as the destination of such goods is a country other than India. This is in keeping with Article 11 of the World Trade Organization’s Trade Facilitation Agreement exempting traffic in transit from extra levy of fees or charges.
Uncertainties in the New Regime
There still exists certain ambiguity on the said provisions. Various Ship Agents Associations have made appropriate representations to the Ministry of Finance and meetings are being held with the concerned officials but no official decision has been issued yet.