SC strikes down levy of GST on ocean freight in CIF contracts

Last Thursday, the Supreme Court held that the recommendations of the Goods and Services Tax (GST) Council do not bind the Union or the States, that the Parliament and the State legislatures possess simultaneous power to legislate on GST and that the Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. In practical terms, this means that henceforth all the constituents of the GST Council will have to strive harder to achieve consensus.  

The matter before the Court was the appeal against the decision of Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. [2020(33) GSTL 321 (Guj.)] striking down the levy of 5% Integrated GST (IGST) on ocean transportation costs when goods are imported on CIF (Cost, Insurance, Freight) basis.

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The High Court held that the importer neither availed transportation services nor liable to pay for it, and hence, they were not “recipient” of service either directly or indirectly, that there was no inter-State or intra-State supply as the entire transaction took place outside India and that the notifications levying IGST on such costs and making the importer liable to pay the tax were unconstitutional and ultra vires.

The Supreme Court held that the impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act and since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.  The Court also held that the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service, that the specification of the recipient – in this case the importer – by Notification is only clarificatory and that Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation. The Supreme Court agreed with the High Court to the extent that a tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.

When the government imposed IGST on ocean freight, most importers were convinced that the levy is wrong but many covered under the GST regime preferred to pay the IGST and take input tax credit (ITC) of the same rather than litigate. However, this option was/is not available to those not covered under the GST regime. Also, with ocean freight surging during the last two years, the tax element has become rather burdensome. So, all importers will now be relieved that they will not have to pay the 5 per cent IGST on ocean freight. The government must now clarify that those who have paid the IGST and not claimed ITC of the same can claim refund and ease the procedures for such refunds.

Email : tncrajagopalan@gmail.com