Is GST payable on outbound freight, i.e., freight on exports?
2. This is the limited question on which there seems to be a lot of confusion.
3. For the purpose of understanding this issue, one has first to look at the legal provisions including any notifications that may have been issued in this regard. This article primarily concentrates on outbound freight, i.e., freight on exports outside India.
4. Before proceeding to understand the position regarding taxation of ocean freight on outbound services of exports out of India, it would be fruitful to see the types of contracts for supply of goods that can be entered into for such exports.
5. There can be 3 types of contracts for supply of goods. These are (i) Free on Board (“FOB”); Cost and Freight (“C&F”); and Cost, Insurance and Freight (“CIF”).
6. In FOB contracts, the delivery of the goods is made at the port of export – all charges till the port being met by the exporter. In C & F contracts, the exporter pays the outbound freight upto the importer’s port. In CIF contracts, the insurance too is borne by the exporter. Thus, in an FOB contract, the shipping line charging the freight is dealing with the importer of the goods in the foreign country. Whereas in the other two types of contracts (i.e. C & F and CIF), the shipping line charging the freight is dealing with the exporter of the goods, i.e., the person located in India.
7. At the outset, the reason for this article is the non-extension of a notification which exempted “services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India”. This was by notification under the IGST Act, the initial notification bearing No.2/2018 – Interpreted Tax (Rate). This exemption notification was extended from time to time till 30.09.2022 and ceased to be extended beyond this date.
8. Since this issue is concerned with outbound freights on exports, the provisions are covered by the Integrated Goods and Services Tax Act, 2017 (“IGST Act”).
9. Under the IGST Act, in order to understand this position regarding GST on export freight, there two sections of the IGST Act which have relevance. Firstly, section 12 and, secondly, section 13. Section 12 covers the place of supply of services where location of supplier and the recipient is in India; whereas the section 13 covers the place of supply of services where either the location of the supplier or the location of the recipient is outside India. It is the latter provision (section 13) which is addressed here, as this would cover ocean freight on exports.
10. In addition, it is necessary to understand what is “export of services” and the term “location of recipient of services”. These are defined by section 2(6) and section 2(14) respectively of the IGST Act which reads as under:
“Section 2(6) “export of services” means the supply of any service when –
- the supplier of service is located in India;
- the recipient of service is located outside India;
- the place of supply of service is outside India;
- the payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by the Reserve Bank of India]; and
- the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;”
“Section 2(14) “location of the recipient of services” means –
- where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;
- where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
- where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and
- in absence of such places, the location of the usual place of residence of the recipient;”
11. Sub-sections (1) and (2) of section 13 of the IGST Act read as under:
“Place of supply of services where the location of supplier or location of recipient is outside India –
13(1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.
(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services.
Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.
12. It may be useful to point out that the “supplier” who is charging the ocean freight would be the shipping line and the recipient of the services is normally the shipping exporter.
13. Instantly, it will be seen from sub-section 2 that the place of supply of services would be the location of the recipient of the services – unless any of the provisions of sub-sections (3) to (13) are attracted in which case that sub-section will determine the taxability of the outbound freight.
14. Sub-section (9) of section 13 specifically deals with transportation of goods and it reads as under:
“(a) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.”
This sub-section (9) made the destination of the goods as the criterion and not the recipient/supplier of the service of transportation. Therefore, it created an unintended confusion. At this stage, it may be pointed out that sub-section (9) has been omitted by the Finance Act, 2023, but with effect from a date yet to be notified.
15. There were two main reasons for omitting this section. First, it was felt that it was unnecessary. The place of supply of services of transportation of goods is already determined by other provisions of the IGST Act, such as section 13(2) which states that the place of supply of services is the location of the recipient of the service. Second, it was felt that Section 13(9) could lead to unintended consequences. For example, it could have been interpreted to mean that transportation services provided by foreign shipping lines to Indian exporters – who were also responsible for bearing the ocean freight – were not taxable in India. This could have given foreign shipping lines an unfair advantage over Indian shipping lines.
16. The deletion of section 13(9) ensures that all transportation services, regardless of whether they are provided by Indian or foreign shipping lines, are taxed in India in the same way. This helps to create a level playing field for all businesses and ensures that the Indian government collects the correct amount of tax revenue.
17. However, this omission of sub-section (9) in no way prejudices the manner in which one should view the taxability of outbound freight on exports. This is because under sub-section (2) the place of supply and services shall be the location of the recipient of the services.
18. Now, there are two ways in which one can look at outbound freight on exports. If the export is on C & F or CIF basis, the freight is to be borne by the Indian exporter. In such an event, the recipient of the services would be the Indian party and, therefore, the ocean freight would be subjected to GST. If however, the export from India is FOB (i.e. Free on Board), the insurance and the freight would be met by the importer in the foreign country. It is evident from this that once the export is made on FOB basis, so far as the Indian exporter is concerned the title in the goods and the liability for the payment, inter alia, of the ocean freight would be the responsibility of the foreign importer. The shipping line is, therefore, dealing only with the foreign importer who is located outside India and, therefore, the freight would not fall within the taxable ambit of section 13 of the IGST Act.
19. Indian exporters are not the “recipient of the services” of outbound freight on exports on FOB basis. That person would be the foreign importer and, therefore, outbound freight in an FOB contract will also be the responsibility of the importing foreign party which is located outside India and, therefore, the place of supply would be that place where the importer recipient is located. In such an event, therefore, freight on exports where the foreign importer is responsible for the insurance and freight would not be subjected to the IGST.
20. To sum up,
(i) the non-extension of the exemption notification – for payment of ocean freight in regard to export out of India – beyond 30th September, 2022, does not, by itself, change the position with regard to payment of freight on exports on an FOB basis.
(ii) Under section 13 of IGST Act, the place of supply of services would be the location of the recipient of the services.
(iii) In the case of an FOB contract, for export out of India, the recipient would be the foreign importer and, therefore, no GST would be leviable in such cases.
(iv) However, where the export from India is either CIF or C&F, the recipient of services of freight from the shipping line would be the Indian exporter and, hence, in such cases, GST is leviable.
Ashok Rao
Place: Mumbai
Date: 2nd September, 2023.
Tax Talk with Ashok Rao 