APRIL 26, 2017

By G Mohana Rao

HIGH Seas Sale is a sale wherein goods are still in high seas on its way to its destination. In such cases, the buyer as well as the seller are within the country but the goods are in high seas i.e. in-transit. The issue is whether such a sale is a local sale and if so, whether VATis leviable on such a sale is the key differentiator on the decision of whether to buy the goods after their import in India or on high seas.

So far, no VAT is being paid on High Sea Sales since the sale is beyond Indian boundaries. Now the concern of the trade is what after GST?! How the high seas sales are to be treated in the GST regime?! A lot of concernandconfusion is prevailing in the minds of the trade.

The Advisory Opinion 14.1 of the GATT Valuation Code stipulates that such transaction would constitute an   international transfer of goods.   The latter transaction which led to the import would be the relevant transaction for assessment under Section 14 read with the Rule 4 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 . CBEC Circular No. 32 of 2004 may also be referred in this respect.

In the GST regime too, the situation remains the same as to the nature of transaction i.e. ‘international transfer of goods'. In my humble opinion and in view of the Advisory Opinion 14.1 of the GATT Valuation Code, thehigh seas sales may have to be considered as international transfer of goods and as such shall not be taxed.

But, Proviso to Section 5(1) on Levy of IGST,provides that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are to be levied on the said goods under section 12 of the Customs Act, 1962.

In line with the same, the Customs Act, 1962 has been proposed to be amended in the recent proposed legislation (passed by Lok Sabha). Accordingly, Section 3(7) of the Customs Act, 1962 states:

“(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent as is leviable under section 5 of Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8).”

Furthermore,section 3(8) of the Customs Act, 1962 stipulates that value of the goods for the purpose of levying Integrated tax shall be the assessable value besides Basic Customs Duty (BCD).

Section 3(9) provides that any article which is imported into India shall, in addition, be liable to goods and services tax compensation cess at such rate, as is leviable under section 8 of the Goods and Services Tax (Compensation to States) Cess Act, 2017 on a like article on its supply into India, on the value of the imported article as determined under sub-section 10 of section 3.

However, due to taxation of the complete supply chain and GST being the destination based consumption tax, there would be one major impact. Integrated tax (IGST) would in any case be levied on the full value of the goods including the high sea sale, if any, and the same will move along with the goods in further components of the supply chain. Thus, saving any state levies will be out of question. It would be a completely revenue neutral situation. The incentives for choosing the high sea sale route will simply evaporate and the number of such sales should drastically reduce once GST arrives on the scene. The buyers will resort to high seas route only in case of business need....for instance to ensure dispatch or to escape from hassles of import formalities etc. It appears that with the implementation of multi stage taxing of complete supply chain,many such creative accountings of the past will lose relevance.

(The author is Partner, Elysian Tax Advisors, Mumbai and the views expressed are strictly personal.)