The implementation of Goods and Services Tax (GST) has impacted a wide range of sectors including the shipping industry. Within the sector, there are some areas wherein the GST levy is tilted in favour of international players instead of the domestic ones.
Also, there are certain pain points in the sector that have been highlighted to the government, although an outcome is long awaited.
The areas that the sector is looking for some government attention includes discrimination in taxability of outbound freight in the hands of Indian shipping companies versus foreign shipping companies, import of vessels face IGST of 5%, place of supply and Input Tax Credit (ITC) in case of bunker fuel and other goods, no refund of ITC for GST on outbound freight services provided to Indian customers, sale of vessel located outside India, and possible classification issue for bareboat charter of vessels, among others.
Among the most teething issue is related to freight. A recent EY paper on the shipping industry threw some light on the subject. Firstly, there is discrimination in the taxability of outbound freight when compared between Indian and foreign shipping companies. For example, if an Indian shipping company is providing services of transportation of goods outside the country by a vessel to a domestic exporter, then the place of supply of such transportation services is the exporter's location and 5% GST is payable by the Indian shipping company.
However, if a foreign shipping company is providing the same services to an Indian exporter, then the place of supply of such transportation services will be the place of destination of such goods, i.e., outside India and thus, GST is not applicable.
Hence, the move doesn't provide a level playing field and "this might reduce the competitiveness of the domestic shipping companies as compared to foreign companies who carry out same activities without any taxation in India," read EY's recent paper on the subject.
Further, the government made an amendment to the rules by stating that the point of sale for transportation of goods to a place outside India will be the place of destination of such goods.
However, post-amendment, a reading of various provisions of the IGST Act highlights a different situation…the supply of goods or services, where the supplier is located in India and the place of supply is outside India, is an inter-state supply and liable to GST. Thus, the intention of a level playing field was not fulfilled.
To address the issue, "the government extended the exemption of transportation of goods from India to outside India by air or sea vessel without the requirement of reversal of ITC42. However, this exemption has a sunset clause restricting it up to September 30, 2019. The issue of a non-level playing field for Indian shipping industry will, however, surface post-September 30," the EY paper added.
Secondly, there is no ITC refund on outbound freight services for Indian customers. Services by way of transportation of goods by a vessel provided by an Indian shipping company to a domestic exporter in case of exports is treated as an exempt supply till September 30, 2019.
In case, shipping companies do not have sufficient taxable supplies, the above will result in the accumulation of ITC, thereby leading to a blockage of working capital for shipping lines.
Further, refund of unutilised ITC in the hands of an Indian shipping company will not be available as it is not a zero-rated supply. Therefore, post-September 30, if the exemption is not extended, the supply will become taxable and there will not be any accumulation of ITC in the hands of an Indian shipping company.
Thirdly, on the inbound freight front or import of goods, GST is applicable to the transportation services at 5% irrespective of service provided by an Indian shipping line or by a foreign shipping line.
Further, in the case where the value of taxable service provided by the shipping company is not available with the importer, the same shall be deemed to be 10% of the cost, insurance and freight value of imported goods.
In addition, the valuation for calculating customs duty and IGST payable on import of goods would also include the charges for ocean freight. Payment of IGST separately for ocean freight would result in the same getting taxed twice- under Customs Tariff Act and under IGST Act. On this issue, the Gujarat High Court is hearing a petition.
"However, all these issues and pain points have been presented by the industry and us to the ministries concerned and we are waiting on when this would be taken up in the GST Council," said a Mumbai-based PwC analyst to DNA Money.