The Goods and Services Tax (GST) is in. One of the sectors most affected by the new tax law is the shipping and freight industry. In fact, freight forwarding and the logistics and shipping industry are at the center of the new law. The GST contains extensive provisions with regard to the State Goods and Service Tax (SGST); Central Goods and Service Tax (CGST); Integrated Goods and Service Tax (IGST) and other factors related with the supply of goods and services, input tax credit, time and place of supply, valuation, and provisions for transition.
Understanding Goods and Services Tax (GST)
A comprehensive indirect tax on manufacture, sale, and consumption of goods and services. It replaces different taxes that the Center and State governments levy separately. Tax is collected at each stage on the basis of the input tax credit method. While goods and services will not be distinguished from one another, they will be taxed at a flat rate in the supply chain until they reach the consumer. The administrative responsibility rests with a single authority. Exports are zero-rated supply while imports are charged at the same rates as those on domestic goods and services, while sticking to the destination principle.
Concerns of the logistics and the shipping industry
The logistics and shipping industry has concerns over several aspects of the GST: treatment of supplies, capital goods credit mechanism, transition procedures, bundled services, etc. Several experts feel that the GST tax rate structure may have an adverse impact on the country’s shipping industry. Insiders feel that the tax reform might work against domestic shipping bodies since taxation at time of asset creation as well as discrimination between domestic and foreign shipping companies may strike at global competitiveness and discourage fresh investments.
To this end a delegation from the logistics industry bodies met the GST council to air their concerns over the new tax law. They maintained that their industry be exempted from the new tax burden in order to make Indian exports and manufacturing less expensive and more competitive in the international market. They also pointed out that currently there was no service tax payable as according to the destination rule there is no service tax on the air and sea cargo segment as the destination was outside the country. However, they claimed that now that service tax will be levied and which was at variance with the GST structure being followed by other countries. They also claimed that freight forwarding was exempt from charges but with the coming of the GST, the charges levied will be passed on to the exporters thus making exports uncompetitive, which will be self-defeating and may result in campaigns such as Make in India becoming unfeasible and losing steam.
Understanding provisions of GST for shipping industry of India
Currently, if goods are transported as cargo through ships, outbound shipment is to be considered as exports, while inbound shipment attracts service tax. If transportation takes place through air, then inbound as well as outbound shipments will not be subject to service tax. Subsequently, tax liability, particularly of ancillary items like cargo handling, warehousing, and terminal charges will be determined on the basis of the taxability of the principal service.
Since the GST does not specify specific exclusion for air as compared to ocean freight, transactions, where the place of supply is inside taxable territory, would attract air and ocean freight charges with respect to the GST. This will thus make logistics and freight forwarding a supply of services, to include the movement of goods whether by air, sea, inland waterways, rail, or road. The GST on freight will depend whether the transportation is national or international.
Consequently, for the consideration of domestic freight, transportation of goods has to take place from a place located in India to another place in the country. Consequently, both the points of origin as well as destination have to be located in India. On the other hand, International freight rules will be applied when transportation is taking place and when either the place of origin or the place of destination or both lie outside India.
As we can see, the impact lies in the provisions of the ‘Place of Supply’ in order to determine taxability of cross-border as well as within state transactions. According to the provisions, Place of Supply with respect to the transportation of goods is defined as follows: (a) location of recipient in case recipient is a GST-registered entity; and (b) if recipient is unregistered entity, place of supply will be deemed as the place where goods are handed over for transportation.