GST 30 Jan,2020
Tax on ocean freight - What to expect?
R.G. MuthukumaranManager- Mazars India LLP
Hemal MakwanaAssistant Manager - Mazars India LLP


Levy of IGST on ocean freight has been one of the most contentious issues in recent times, and the provisions relating to levy of service tax or IGST on ocean freight payable on import of goods has been challenged before various High courts .

Recently, the Hon'ble Gujarat High Court has allowed a batch of writ petitions wherein it has declared various notifications issued under Integrated Goods and Services Tax Act, 2017 (IGST Act) and Finance Act, 1994 as ultra vires and unconstitutional.

Importers in India are forced to face an unpleasant scenario with respect to the levy of IGST on ocean freight under reverse charge in addition to the customs duty and IGST levied on the assessable value i.e. Cost, Insurance and Freight (CIF) of goods at the time of import.

Gujarat High Court Decision

The Hon'ble Gujarat High Court has held that under Section 5(3) of the IGST Act the Government is only authorized to specify the categories of supply on which the tax is to be paid by the 'recipient of the supply' under the reverse charge basis. The Government cannot further specify the person liable to pay tax as other than the recipient of the supply.

Therefore, the Hon'ble High Court held that the Notifications levying tax on supply of ocean freight service and making the importer of goods as the person liable for paying the tax are unconstitutional as there is no statutory sanction for levy and collection of such tax.

Further, in para 248 of the said order, the court has observed as follows:

"248. In the case on hand, there is no challenge to the competence of the Legislature in enacting Section 5(3) of the IGST Act which empowers the Government to notify the goods or services upon which tax is liable to be paid by the recipients. The issue in the present case is, when the statutory provision empowers collection of tax from the recipient of goods or services, then whether the delegated legislation by way of notification can stipulate imposition of tax on a person who is neither the supplier nor the recipient of service. Thus, this decision is of no avail to the respondents."

From a reading of the above para, it is understood that Section 5(3) of IGST Act as it stands now does not empower the Government to notify a person other than the recipient of goods or services as person liable to pay tax.

Therefore, it is to be noted that it is still open for the legislature to correct this lacunae by way of a retrospective amendment to Section 5(3) of IGST Act.

Concluding Thoughts

While Gujarat High Court has held the provisions relating to levy of ocean freight as unconstitutional, there is lack of clarity on whether other High Courts would take similar course or will the legislature resort to a retrospective amendment to validate the levy.

Further, it is also important for the Government to make suitable amendments to CGST Act and the Rules to ensure that wherever the ITC availed on ocean freight is not disputed by the authorities basis the decision of Gujarat High Court.

It is the imperative of the law makers to engage with the trade bodies and address the concern of the stake holders and prevent further litigation on the subject.

It is also pertinent to note that exemption is provided vide Notification No. 6/2018 (IGST Rate) dated January 25, 2018 from payment of IGST on royalty and license fees as import of service where the same has been included in the transaction value for the purposes of valuation under Customs Law. In this backdrop, industry would welcome if a positive step is taken by the Government in terms of providing similar exemption on ocean freight.