No IGST on Ocean Freight in CIF Contracts

CIF stands for Cost, Insurance, and Freight. A CIF Contract is a contract of sale of goods by shipment where the seller pays for the cost of transport and insurance of the goods to the destination and the legal delivery is when the goods cross the ship's rail in the port of shipment.

In case of imports under CIF contracts, ocean freight is borne by the seller located outside India. The question here is whether IGST on reverse charge basis is payable on such ocean freight by the importer.

Amendment dated 26.09.2023:

Earlier, Sl. No. 9(ii) of Notification No. 8 /2017-Integrated Tax (Rate) dated June 28, 2017 ("the IGST Service Rate Notification") provided that on the inter-state supply of services of "Transport of goods in a vessel including 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" was leviable to Integrated Tax at rate of 5 percent.

Further, SI. No. 10 of Notification No.10/2017-Integrated Tax (Rate) dated June 28, 2017 ("the Reverse Charge Service Notification") stated that services supplied by a person located in non-taxable territory to a person located in non-taxable territory of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, is taxable under reverse charge basis.

Accordingly, the importer was liable to pay IGST on ocean freight paid on imported goods under the reverse charge mechanism.

This aspect was clarified by the Hon'ble Supreme Court, in the case of Union of India v Mohit Minerals Pvt. Ltd. on 19th May, 2022.

Following are the points held by the court:

• The assessee is liable to pay IGST on the 'composite supply', comprising the supply of goods and supply of services of transportation, insurance, etc., in a CIF contract. If there is a separate levy on the assessee for the supply of services' by the shipping line, then, it would be in violation of Section 8 of the CGST Act and would amount to double taxation.
• Hence, there cannot be a separate levy of IGST on the component of ocean freight paid by the foreign exporter to the foreign shipping line in the CIF contract.

Thereafter, the CBIC issued Notification Nos. 11/2023, 12/2023, 13/2023-Integrated Tax (Rate), dated September 26, 2023 made the following changes:

The CBIC vide Notification No. 11/2023-Integrated Tax (Rate) dated September 26, 2023 omitted the words "including 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." from Sl no. 9(ii) of the IGST Service Rate Notification.

Also, Proviso to Section 12(8) of the IGST Act is omitted with effect from October 01, 2023 so as to specify the place of supply of services by way of transportation of goods to a registered person, to be the location of recipient, and in other cases the location at which goods are handed over for their transportation, irrespective of destination of the goods, in cases where the supplier of services and recipient of services are located in India.

Also, the CBIC vide the Notification 12/2023-Integrated Tax (Rate) dated September 26, 2023 removed the restriction as stated in the IGST Service Exemption Notification.

Furthermore, the CBIC vide Notification 13/2023-Integrated Tax (Rate) dated September 26, 2023, omitted Sl. No. 10 of the Reverse Charge Service Notification.

Conclusion :

As the effect of the above mentioned notifications and decision of Hon’ble Supreme Court, no IGST is to be paid on ocean freight while importing the goods under CIF contracts. This is effective from 01st of October, 2023. As per the ruling in the Mohit Minerals case, the Hon’ble Supreme Court had held that 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 (Cost Insurance Freight) contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of the GST Act. This is implemented by the CBIC by way of issuing notifications dated 26.09.2023. This will relax the burden of double taxation on Indian importers on the part of freight.