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Taxability of High Sea Sales / Supply Under GST

May 22, 2017

“High Sea Sales” is a terminology used in common parlance for “Sales in the course of import.” There is a distinction between the words “in the course of import” and the word “import”. The concept of high sea sales is not a legal term but a colloquial term used for “Sales in the course of import.” Sale taking place by transfer of documents of title to goods before goods are cleared from customs, is a sale in the course of import i.e. high sea sales and not liable to sales tax. The terminology “High Sea Sales” should be replaced by “High Sea Supply” in the context of GST.

The concept of high sea sales has its genesis in Article 286 (1)(b) of the Constitution which stated that no law of a State shall impose, or authorize the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place in the course of the import of the goods into, or export of the goods out of, the territory of India. Article 286(2) further provided that Parliament may by law formulate principles for determining when a sale or purchase of goods takes in any of the ways mentioned above. Article286 has been amended vide Constitution (One Hundred and First Amendment) Act, 2016, to substitute for the words “the sale or purchase of goods where such sale or purchase takes place”, the words “the supply of goods or of services or both, where such supply takes place”.

Law Commission report dated 2nd July, 1956 recommended the principles for determining when a sales or purchase takes place in the course of import or export. It was observed in the law commission report that it appears illogical that last purchase preceding the export should be exempt whereas the first sale following the import should not be exempted. Section 5 of the CST Act, 1956 is based on the principles of above law commission report regarding sales or purchase in the course of import or export. Section 5(2) of CST Act provides that a sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

Unfortunately, IGST Act has not defined the term “supply of goods or of services or both, where such supply takes place in the course of the import of the goods or services into, or export of the goods or services out of, the territory of India”, even though only parliament has the power to do so as per Article 286(2).

Nevertheless, one can draw conclusion about the taxability of “high sea supply” transaction or “Supply of goods in the course of import” from charging section 5 read with Section 7 of IGST Act.

Section 5 of IGST says that there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods.

Section 7(2) deems “supply of goods imported into the territory of India, till they cross the customs frontiers of India to be a supply of goods in the course of inter-State trade or commerce.”

It is evident that while “supply of goods imported into territory of India” has been deemed to be supply in the course of inter-state trade or commerce but “supply of goods in the course of import into territory of India” has not been deemed to be a supply of goods in the course of inter state trade and commerce. Since “supply of goods in the course of import into territory of India is not a transaction of deemed inter-State supplies of goods, therefore a tax called the integrated goods and services tax cannot be levied upon it as per Section 5.

In the absence of definition of “supply of goods or services in the course of import into territory of India”, one will have to take recourse to the analogous provisions in the CST Act and existing jurisprudence in terms of various court judgments.

Further, it can be argued that India does not have a territorial jurisdiction to levy tax on goods till they cross the customs frontiers of India. A foreign agent who buys goods from a foreign supplier and sells them to Indian importer through transfer of documents of title to goods before they cross the customs frontiers of India cannot be made liable to register and pay IGST in India.

This article was first published on LinkedIn by Vinay Kumar Shraff

Tags: GST, GST 2017, GST Bill, GST Council, GST Impact, GST India, GST Latest News, GST Law, GST News, GST Rates, GST Reform, GST Tax Structure, High Sea Sales under GST

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