1. What services were exempted till 30-09-2022?
a) Services by way of transportation of goods by an aircraft from customs station of clearance in India to a place outside India.
b) Services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India.
In simple words, the exemption was in respect of air freight and ocean freight provided in respect of Export of Goods.
2. How was the exemption provided?
Exemption was provided through S.No.20A and S. No.20B of Notn. No. 9/2017 – IGST (Rate). S.No.20A and S.No.20B were inserted vide Notn. No.2/2018 – IGST (Rate) dt.25th January, 2018.
3. What is the rate of tax applicable from 1-10-2022?
a) Air Freight: Transportation of goods by an aircraft will be covered under the residual clause (vii) of S.No.9 Heading 9965 (Goods transport services) of Notn. No.8/2017 – IGST (Rate) – “Goods transport services other than (i), (ii), (iii), (iv), (v), (vi) and (via) above” and accordingly the rate of tax will be 18%.
b) Ocean Freight: Transportation of goods by a vessel will be covered under the specific clause (ii) of S.No.9 Heading 9965 (Goods transport services) of Notn. No.8/2017 – IGST (Rate) – “Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.” and accordingly the rate of tax will be 5%. This lower rate of 5% is a conditional rate provided for the service providers subject to the condition that ITC on goods is NOT availed by the Shipping Line or the service provider engaged in providing Transportation Services.
4. What will be the difference between FOB Exports and CIF Exports?
In the case of FOB Exports, the export freight will be paid by the Customer outside India. In such a situation, the service by the Airline or Shipping Line to the customer outside India will be an Export of Service and will NOT be leviable to GST.
In the case of CIF Exports, the freight for the transportation of goods will be paid by the Indian Exporter. In such a situation –
a) The Airline or Shipping Line in India will charge GST on forward charge to the Indian Exporter.
b) If the Airline or Shipping Line is Outside India, then GST will NOT be applicable on Reverse Charge also since the transaction is not covered under the definition of “Import of Services”.
5. What is the ambiguity if the Airline or Shipping Line is Outside India in the case of CIF Exports?
Popular Interpretation: Sec.2(11) of the IGST Act which defines Import of Services provides that one of the condition for a service to be covered as Import of Services is that the Place of Supply must be in India. The Place of Supply for Transportation Services has been provided for in Sec.13(9) of the IGST Act which is the place of destination of such goods. Therefore, the place of supply in the case of export of goods is Outside India and does not fall within the definition of Import of Service. Also, the observations in Para 176 of the Gujarat High Court Order in the case of Mohit Minerals Pvt. Ltd. support that the provisions of Sec.7(5)(c) will not be applicable to this transaction. Therefore, the service provided by Airline or Shipping Line located in non-taxable territory will not be subjected to Reverse Charge Mechanism.
Impact of the above Interpretation: Freight paid for CIF Exports to Indian Airline or Shipping Line attracts GST whereas if it is paid to a Foreign Airline or Shipping Line, then GST is NOT applicable.
Alternate Interpretation: Sec.7(5)(c) of IGST Act is a residuary clause which covers transactions under the term “Interstate Supply”. This provision reads as follows –"Supply of goods or services or both, - in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce". Further S.No.1 of IGST Rate Notification 10/2017 provides for Reverse Charge generally for any situation where supplier is in a non-taxable territory and recipient is in a taxable territory and is not specific to Import of Services. Therefore, RCM will be applicable on Freight paid to Airline or Shipping Line Outside India in the case of CIF Exports.
6. What will be the eligibility of ITC for the Indian Exporter?
Indian Exporter as the recipient of service can avail Input Tax Credit on the GST charged by the Indian Airline or Shipping Line and also the GST paid under Reverse Charge basis in respect of freight paid to an Airline or Shipping Line located in non-taxable territory.
Note: The aspects discussed in this article are ONLY with respect to Freight paid on Export of Goods. Applicability of tax on freight paid on Importation of Goods is a separate subject and not discussed here.