Service Tax on Import Sea Freight: Amendments Overdone

The service of transportation of goods by a vessel from outside India to a customs station of clearance in India (i.e., import sea freight) was not leviable to service tax. This was on account of inclusion of the said service in the 'Negative List' under Section 66D of the Finance Act, 1994.

The aforementioned clause in Section 66D ibid was omitted with effect from June 01, 2016, resulting in the said service becoming taxable. Nevertheless, service tax was still exempt in case of services provided by a person located in non-taxable territory to a person located in non-taxable territory (i.e., when the goods were shipped by a foreigner through a foreign vessel to India) by virtue of an entry in clause 34 of the Mega Exemption Notification No.25/2012-ST dated June 20, 2012, as amended. The taxability of import freight is summarised in the table below for clarity:

Service Provider	Service Recipient / Person liable to pay freight	Taxability
Indian ship liner (viz., in taxable territory)	Indian importer / freight forwarder (viz., in taxable territory / on FOB basis)	Service tax is payable by the service provider (i.e., the Indian ship liner) under the forward charge mechanism. It is payable at an abated value of 30% by virtue of clause 10 in Notification No.26/2012-ST dated June 20, 2012, as amended. Hence, the effective service tax rate is 4.5% (i.e., 15% * 30%). Either the Indian importer or freight forwarder, on whom the invoice is raised by the Indian ship liner, can avail CENVAT credit (if eligible under the CENVAT Credit Rules). However, if service recipient is the exporter in non-taxable territory, then CENVAT credit cannot be claimed; in that case, service tax paid by the service provider would be a cost.
	Exporter (viz., in non-taxable territory / on CIF basis)
Foreign ship liner (viz., in non-taxable territory)	Indian importer / freight forwarder (viz., in taxable territory / on FOB basis)	Service tax is payable by the service receiver (i.e., the Indian importer / freight forwarder) under the reverse charge mechanism (RCM), by virtue of clause I (B) of the Notification No.30/2012-ST dated June 20, 2012, as amended. While it is payable at an abated value of 30%, resulting in an effective service tax rate is 4.5% (i.e., 15% * 30%), this option is not without dispute owing to a recent CBEC Circular (which is detailed in the next sub-heading). Either the Indian importer or freight forwarder, whoever is the service recipient and pays service tax under RCM, can avail CENVAT credit (if eligible under the CENVAT Credit Rules) on the basis of challan evidencing such payment.
	Exporter (viz., in non-taxable territory / on CIF basis)	Was exempt, by virtue of clause 34 of the Mega Exemption Notification No.25/2012-ST dated June 20, 2012, as amended.

It is evident that the aforementioned situation was not a level playing field, since imports on CIF basis (where the services were provided by a foreign ship liner) was distinctly advantageous. Possibly, at the time of unveiling the Budget 2016, the Government did not foresee the exemption (detailed herein above) or was unsure of how to tax them.

To provide a level playing field, the Government amended clause 34 of Notification No.25/2012-ST to remove the aforementioned exemption. Hence, import sea freight paid by an exporter (in non-taxable territory) to a foreign ship liner (also in non-taxable territory) became liable to service tax. However, in the above scenario, both the service provider and service recipient were located outside India. Hence, the Government fixed the responsibility of paying service tax on the person in-charge (i.e. master) of the vessel or his agent vide amendments to the Service Tax Rules, 1994 and Notification No.30/2012-ST dated June 20, 2012.

Service Provider	Service Receiver (i.e., Freight paid by)	Taxability
Foreign ship liner (viz., in non-taxable territory)	Exporter (viz., in non-taxable territory / on CIF basis)	Service tax was payable by the person in-charge (i.e., master) of the vessel or his agent. However, CENVAT credit cannot be availed on such service tax paid, since service recipient is located in non-taxable territory in this case. Hence, it would add to the cost of the Indian importer.

 

In the aforementioned scenario, neither the Indian importer nor the Indian freight forwarder had any role to play with regard to service tax liability on import sea freight.

Dispute on abatement / effective tax rate; Compounding value introduced retrospectively: 

• As aforementioned, service tax is payable at an abated value of 30%, subject to the condition that CENVAT credit on inputs and capital goods have not been availed by the service provider. This results in an effective service tax rate of 4.5% (i.e., 15% * 30%).
• However, since foreign ship liners are not registered in India and hence do not follow the CENVAT Credit Rules, the CBEC clarified (vide paragraph 4.1 of a subsequent circular dated April 13, 2017) that benefit of such abatement cannot be availed by the foreign ship liners.
• Nevertheless, in the absence of any amendment to that effect in the Act or the Rules or the Notifications issued under the Act, the CBEC Circular has no legal sanctity and is unlikely to be upheld in a court of law. Rather, on a plain reading, the service provider (being a foregin ship liner) would not have availed such CENVAT credit and hence would have simply complied with the condition. Consequently, litigation is expected to be abound in this subject matter.
• Further, vide a Notification dated April 13, 2017 (but with retrospective amendment from January 22, 2017), the person liable to pay service tax (i.e, the person in-charge / master of the vessel or his agent) has the option to pay service tax (including SBC and KKC) at a compounded rate (of 1.5% of the CIF value of imported goods). While taxpayers may conveniently opt for such compounding to avoid potential disputes, the option would be commercially unviable in case of goods entailing high CIF value (like jewellery / titanium).

Point of Taxation fixed retrospectively: 

• At the time of making the amendment in January 2017, the Government did not specify the point of taxation for the aforementioned service. Hence, the general Rule 3 of Point of Taxation Rules, 2011 was followed by the taxpayers.
• However, vide Notification dated April 13, 2017, but with retrospective effect from January 22, 2017, the point of taxation has been fixed (vide Rule 8B ibid) as the date of bill of lading of goods at the port of export.
• Consequently, it is advisable for the taxpayers to pay interest, if there was a belated payment owing to the retrospective amendment, to avoid litigation and penalties.

In an unrelenting way, the Government further tinkered with Service Tax Rules, 1994 and Notification No.30/2012-ST, possibly with a view to ensure better enforcement or recovery of service tax from an Indian entity. Hence, the liability to pay service tax was fixed on the importer of goods.

Service Provider	Service Receiver (i.e., Freight paid by)	Taxability
Foreign ship liner (viz., in non-taxable territory)	Exporter (viz., in non-taxable territory / on CIF basis)	Service tax is payable by the importer of goods. CENVAT credit can be availed by the importer on the basis of challan evidencing payment of service tax. Further, in order to so avail, the imported goods should be used as inputs or capital goods by the importer (as a manufacturer or output service provider).

 

In the aforementioned scenario, an Indian freight forwarder (who may be involved in the shipment) does not have the liability to pay service tax on import sea freight since only the importer of goods has been specifically identified for that purpose by law. Nevertheless, it is imperative on the part of freight forwarder to inform the importer that the sea freight was paid by the exporter consequent to which the importer is liable to pay service tax under the RCM.

Option between compounding vis-a-vis abatement - pros and cons: 

The importer can opt to pay service tax by either of the two methods:

(1) at a conditionally abated value of 30% as aforementioned, resulting in an effective service tax rate of 4.5% (i.e., 15% * 30%);

• However, as discussed earlier, this option is abound with dispute since the CBEC has clarified that benefit of abatement cannot be availed by foreign ship liners, albeit the Circular has no legal sanctity in the absence of any amendment to that effect in the Act or the Rules or the Notifications issued under the Act.
• Moreover, in cases where a freight forwarder is involved, opting for this method would result in the importer knowing the actual freight cost (charged by the ship liner on the freight forwarder) and the mark up (claimed by the freight forwarder from the importer).

(2) at 1.5% of the CIF value of imported goods.

• As discussed earlier, while taxpayer may conveniently opt for such compounding to avoid potential disputes with the Department relating to abatement, this option would prove costly in case of goods entailing a high CIF value (like jewellery / titanium).
• But, in cases where a freight forwarder is involved, the latter would undoubtedly favour this method since the importer will not know the actual freight cost and the mark up.

Point of Taxation: The point of taxation for the said service is the date of bill of lading of goods at the port of export. 

With the GST law round the corner, it remains to be seen if the Government is done with the amendments on import sea freight.