Service Tax on ocean freight - A deep look
APRIL 24, 2017
By G Natarajan, Advocate, Swamy Associates
THE following services were kept in the negative list, when negative list based service tax levy was introduced from 01.07.2012.
services by way of transportation of goods-
(ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India;
The above entry has been removed from the negative list, from 01.06.2016.
The following exemption has been introduced in Notification 25/2012 ST Dt. 20.06.2012, vide Notification 9/2016 ST Dt. 01.03.2016 with effect from 01.06.2016.
53. Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India.
As a result of the above changes, ocean freight for import consignments upto Indian sea port has become taxable, from 01.06.2016 wile air freight for import consignments continue to be exempted.
As a consequence, if the services of a Freight Forwarder / Multimodal Transport operator / Shipping line located in India is availed by an importer in India, service tax would be applicable in the hands of the service provider on the ocean freight received by them. If the service provider is situated outside India, service tax is payable by the Importer, under reverse charge.
But if the foreign consignor, engages a foreign shipping line to transport the goods to an Indian Port, even though the place of provision of such service is India (destination of the goods – Rule 10 of the Place of Provision of Service Rules, 2012) no service tax is payable, as per the following Exemption available under S.No, 34 (c) of Notification 25/2012.
34. Services received from a provider of service located in a non- taxable territory by -
(c) a person located in a non-taxable territory
This seems to have created an anomalous situation whereby if transport is arranged by the Consignor based out of India through a shipping line based outside India, service tax would not be payable, whereas service tax would be applicable under reverse charge, if the Indian importer engages a shipping line based outside India.
In order to set right such anomaly certain amendments have been made vide Notifications 1/2017 ST and 3/2017 ST, dated 21.01.2017, with effect from 22.01.2017. BY virtue of these changes, the representative of the foreign shipping line in India, who files the import manifest was made liable to pay service tax. This has created lots of doubts, such as,
- How to ascertain the value of freight?
- What is the point of taxation to pay service tax?
- Can he collect the service tax from the importer?
- Can the importer avail cenvat credit of such service tax?
In order to address the above issues, Notifications 14 to 16/2017 S.T. Dt. 13.04.2017 and Notification 10/2017 CE NT Dt. 13.04.2017 have been issued. Circular No. 206/4/2017 Dt. 13.04.2017 has also been issued to explain the amendments. The changes introduced vide the above notifications shall come into effect from 23.04.2017, except certain changes which are made retrospectively from 22.01.2017.
Let us try to understand the impact of these notifications.
Notification 14/2017
This notification seeks to introduce a new Rule 8 B in the Point of Taxation Rules, 2011 to prescribe point of taxation for the subject services. This amendment has been made with retrospective effect from 22.01.2017. The said rule lays down the Point of taxation as,
8B. Determination of point of taxation in case of services provided by a person located in non-taxable territory to a person in non-taxable territory.- Notwithstanding anything contained in these rules, the point of taxation in respect of services provided by a person located in non-taxable territory to a person in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, shall be the date of bill of lading of such goods in the vessel at the port of export."
(Does the Government has the power to retrospectively amend these Rules?)
Notification 15/2017
Notification 30/2012 prescribes the various situations in which the service tax is payable by persons other than the service providers (normally service recipients) and the extent to which the same is payable. The said notification has been amended to make the following person as liable for payment of service tax, for the subject services.
Explanation V.- For the purposes of this notification, in respect of services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, person liable for paying service tax other than the service provider shall be the importer as defined under clause (26) of section 2 of the Customs Act, 1962 (52 of 1962) of such goods."
Notification 16/2017.
The person liable for payment of service tax has been changed from the person filing import manifest to the importer, under Rule 2 (1) (d) (i) (EEC) of the Service Tax Rules, 1994.
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As introduced by Notification 2/2017 w.e.f. 22.01.2017
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Now amended by Notification 13/2017 w.e.f. 23.04.2017
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in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) with respect to such goods.
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in relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the importer as defined under clause (26) of section 2 of the Customs Act, 1962 (52 of 1962) of such goods;";
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In many situations, the exact amount of freight paid by the foreign exporter to the foreign shipping line would not be known, in case of CIF imports. In such situations, service tax can be paid at 1.4 % of the total CIF value of imports (i.e the total value of imported goods). In addition 0.5 % Swachh Bharat CESS and another 0.5 % Krish Kalyan Cess would also be payable.
Notification 10/2017 CE NT Dt. 13.04.2017
The definition of input service has been amended and the following service is included in the definition, to enable the importer to avail cenvat credit of service tax paid by him in the given circumstances and certain other consequential amendments are also made.
(i) services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India where service tax is paid by the manufacturer or the provider of output service being importer of goods as the person liable for paying service tax for the said taxable services and the said imported goods are his inputs or capital goods.
So far so good.
But the Somalian pirate in the so far peaceful voyage is the following clarification contained in Circular NO. 206/4/2017 Dt.13.04.2017.
4. It is pertinent to point out here that under notification No. 26/2012-ST dated 20.06.2012 (Sl. No. 10), there is an exemption on 70% of value of services of transportation of goods in a vessel subject to the fulfillment of the condition that Cenvat credit on inputs and capital goods used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. This conditional exemption has been extended for the reason that out of the full value of such services, the exempted value of service has already suffered taxes (Central Excise) which would have been available as Cenvat credit to set off service tax on full value of service. In effect, service tax is levied on the value added only. However, in case of foreign shipping lines, their services being exports from their home country, are zero-rated in their home country and thus have suffered no taxes. Further the foreign shipping lines do not get registered in India and do not follow the provisions of Cenvat Credit Rules.
But how far this clarification is legal. If we look at the relevant entry under S.No.10 of Notification 26/2012 ST Dt. 20.06.2012, it reads as,
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Act), and in supersession of notification number 13/2012-Service Tax, dated the 17th March, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 211(E), dated the 17th March, 2012, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of the description specified in column (2) of the Table below, from so much of the service tax leviable thereon under section 66B of the said Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column (3) of the said Table, of the amount charged by such service provider for providing the said taxable service, unless specified otherwise, subject to the relevant conditions specified in the corresponding entry in column (4) of the said Table, namely :-
TABLE
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Sl.No.
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Description of taxable service
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Percent- age
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Conditions
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10
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Transport of goods in a vessel
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30
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CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004
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The above notification is applicable for "transport of goods in a vessel” without any further qualification. It does not make any distinction based on the location of the service recipient and the service provider. If so, how can the circular bring a non existent restriction?
Further, the reasoning behind the clarification is also flawed in the context of the decision of the Hon'ble Supreme Court in SRF LTD Vs Commissioner of Customs – 2015-TIOL-74-SC-CUS.
If the clarification contained in the circular is true, whoever is directly availing the services of a foreign shipping line (the present amendments are relating to foreign shipping line providing service to foreign exporter) and paying service tax under reverse charge already (from 01.06.2016) would not be entitled for any abatement.
Another goof up.
Shouldn't law making, having international implications be little more serious?
(The views expressed are strictly personal.)
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