How apex court gives ‘supreme’ relief to businesses by ending double taxation on ocean freight

With the advent of Goods and Services Tax (GST) regime, Excise, Service Tax, and State VATs were subsumed in one single law — i.e. GST. This revolutionary reform in taxation has brought about great ease in compliance in the business community. However, at the same time, it brought along with it some complications and instances of double taxation. One such glaring example was double taxation on ocean freight paid by importers.

One must start with explaining the background of what this whole issue is. When an importer imports goods, he/she has to pay countervailing duty on the landed cost of goods. For the uninitiated, countervailing duty was excise duty levied on imports. 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, the 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 the government collects tax from buyers of goods and services when the supplier of goods and services is 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 to the government on the purchase of goods and services. 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 pays 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, the importer has to pay Countervailing Duty (CVD) on Rs 1,150. If the excise duty rate on goods imported is 10 per cent, then the importer has to pay Rs 115 as a countervailing duty. At the same time, the importer has to separately pay a service tax on ocean freight of Rs 100. The service tax was 15 per cent and that was chargeable on ocean freight of Rs 100 which means that importer has to pay another Rs 15 as service tax. This aggregates to a total of Rs 130 as the total tax payable by the importer. After the enactment of GST laws, instead of service tax, the importer had to pay a GST of 5 per cent on ocean freight.

In other words, the ocean freight paid to transport goods into India was taxed twice. The first time, under excise law as per rates prescribed on the goods imported and the second time under service tax law at a rate of 18 per cent on the amount paid as Ocean Freight in the pre-GST regime. This was how the same expenditure was subjected 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 the 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. The first time, as per rates prescribed on the goods imported, and the second time under Reverse Charge Mechanism at a rate of 5 per cent on the amount paid as Ocean Freight.

In January 2020, the Gujarat High Court granted a stay to importers on payment of GST under the reverse charge mechanism on ocean freight, in Mohit Minerals Pvt Ltd v/s Union of India case. This judgement was path-breaking because it attempted to correct the anomaly in law and stop the incidents of double taxation on the same event — payment of ocean freight.

Ideally, the GST Council should have urgently taken up and seriously deliberated on this issue of double taxation on ocean freight and resolved the same. As per tenets of taxation, a government cannot tax the same thing twice. Many trade associations and bodies had made representations to the GST Council for the removal of this double taxation, but no action was taken on the same.

Now, the Supreme Court has upheld the Gujarat High Court order in the Mohit Minerals Pvt Ltd v/s Union of India case, and put an end to double taxation of ocean freight by charging IGST on reverse charge on ocean freight. This is a path-breaking judgement aimed at removing anomalies in the law, created by delegated legislation in the form of circulars, etc.

Hopefully, this judgement should act as a catalyst for the GST Council to review all legacy circulars and rules and remove all anomalies in law, making compliance simple and taxpayer-friendly, along with complying with the basic principle of law and canons of taxation. The GST Council must take cognisance of the same and instruct the legal and technical teams in the GST department to look into this issue and suggest amendments that the GST Council should take up.

The author is a chartered accountant by qualification and a Corporate Finance professional, is the author of ‘Diagnosing GST for Doctors’. He tweets from @sumeetnmehta. Views expressed are personal.

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