Service Tax on Ocean Freight - A deep look - Central Excise

1 Service Tax on Ocean Freight A deep look (G. Natarajan, Advocate, Swamy Associates) The following services were kept in the negative list, when negative list based Service tax levy was introduced from 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 The following exemption has been introduced in notification 25/2012 ST Dt. , vide notification 9/2016 ST Dt. with effect from 53. services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India.

2 As a result of the above changes, Ocean Freight for import consignments upto Indian sea port has become taxable, from 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 , 34 (c) of notification 25/2012.

3 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 , with effect from 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.

4 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 Dt. and notification 10/2017 CE NT Dt. have been issued. Circular No. 206/4/2017 Dt. has also been issued to explain the amendments. The changes introduced vide the above notifications shall come into effect from , except certain changes which are made retrospectively from 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 .

5 This amendment has been made with retrospective effect from 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 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?)

6 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 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.

7 " 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. As introduced by notification 2/2017 Now amended by notification 13/2017 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.

8 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;"; 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 % of the total CIF value of imports ( the total value of imported goods). In addition % Swachh Bharat CESS and another % Krish Kalyan Cess would also be payable.

9 notification 10/2017 CE NT Dt. 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.

10 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 4. It is pertinent to point out here that under notification No. 26/2012-ST dated (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 .