Outbound/export freight is liable to GST from 1st October

 This is to apprise you about the withdrawal of following two exemptions* from October 1, 2022:

 

-               Services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India

 

-               Services by way of transportation of goods by an aircraft from customs station of clearance in India to a place outside India

 

*[Refer S. No. 20A and 20B of Notification No. 9/2017-Integrated Tax dated June 28, 2017]

 

| Remarks on Impact of Exemption Withdrawal

 

·                The Indian shipper will now charge GST on all the outbound shipments based on mode of transport as follows:

 

Mode of transport	GST Rate
Vessel only	5 percent
Air only	18 percent
Multi-model where sea voyage is dominant (E.g. in Door-to-Door incoterm)	5 percent if considered a composite supply Note: Some service providers are also charging separate GST on separate modes of transport. E.g., transport of goods other than GTA is exempt. So, for road transport part, some are not charging GST.
Multi-model where air transport is dominant (E.g., in Door-to-Door incoterm)	18 percent if considered a composite supply   Note: Some service providers are also charging separate GST on separate modes of transport. E.g., transport of goods other than GTA is exempt. So, for road transport part, some are not charging GST.

 

·                This may not be the good news for logistics sector especially dealing only in sea freight services.

 

·                However, this could be a relief for some freight forwarders whose Input Tax Credit (‘ITC’) became cost earlier because of this exemption.

 

·                For example, in case of ‘Door-to-door’ incoterms, the freight forwarders had to pay GST under reverse charge on road transport services till port of export but could not avail ITC because the outbound freight was exempt. Similar impact was on domestic handling services. This automatically led to 5-12 percent increase in freight cost on outbound shipments earlier. In fact, to avoid that some became GTAs themselves. Going forward, they can utilise the ITC on GTA services as well as on other input handling services received in India against GST on outbound shipments. However, in such case 18 percent GST has to be charged for sea transport since for 5 percent GST, ITC will still be restricted.

 

·                It is to be noted that impact of the withdrawal of exemption must be seen in each fact of the case analysing various incoterms. It may benefit some and may adversely affect others, depending on the dynamics and horizon of the business.

 

·                But one thing is certain that this will affect the working capital of exporters, especially SMEs.

 

 | Remarks on Possible Tax Planning for Indian Exporters

 

·                Under the Service Tax regime, all outbound shipments were non-taxable since the place of provision of service was inextricably connected with the levy under Section 66B of Chapter V of the Finance Act 1994.

 

·                However, the Parliament made a departure under GST laws. The levy under GST laws is being disconnected with the place of supply. Meaning that even if the place of supply is outside India, IGST shall be levied where the supplier is in India. Thus, even if the place of supply in outbound shipments are outside India (destination), IGST shall be applied if the shipper is Indian.

 

·                As a corollary, where the shipper is a foreign entity, IGST shall not be levied since the place of supply remains outside India. In simple words, where the supplier and place of supply is outside India, levy under Section 5 of the IGST Act does not arise.

 

·                However, one has to analyse other feasibility or costs aspects in hiring a foreign shipping lines.