GST suffered on input services by the Indian cargo liners may become cost to them, which will ultimately be passed on to the exporters as a part of the freight charges

The issue deliberated in this article pertains to the transaction of shipping of goods by India based cargo liners for export from India. The service of transportation of goods in a vessel attracts GST @ 5% with input tax credit (ITC) of only input services. However, if the service qualifies as a ‘zero rated supply’ as defined under IGST Act, then the said service would not bear this GST incidence of 5% and the incidence of GST suffered on input services can be claimed as refund also. Export of services is considered as a zero-rated supply under GST. The exporter of service has two options as follows:

  • Pay IGST and then claim refund of the same. All ITC can be utilized for payment of GST under this option.
  • Export without payment of GST under LUT and claim refund of ITC on inputs and input services. GST paid on capital goods is however not refunded.

For a service to qualify as export of service, one of the conditions is that the Place of Supply (POS) should also be outside India.

The incoterms for export of goods may broadly be categorized as on FOB basis or other, like C&F/CIF basis.

Export of Goods from India on CIF/CNF Basis

In this case, the Indian exporter must charter a ship. If he charters an Indian shipper, then GST becomes chargeable by the shipper. The POS for such supply by Indian shipper as per the provisions of IGST Act prior to its amendment i.e. up to 1.2.2019, was the place where the Indian registered exporter was located i.e. in India. From 1.2.2019, the said POS is the place of destination of goods i.e. place outside India. Despite the POS being outside India, such service received by Indian exporter will not qualify as export of service as the recipient of service (Indian exporter) is located in India. Therefore,the above amendment in POS provision does not provide any relief as the service provided by the Indian shipper continues to be subject to GST. As the charging of GST by Indian shippers from the exporter of goods resulted into working capital issues for the exporters, the Government provided a temporary relief by way of granting an exemption from GST on the said service of transportation of goods to place outside India w.e.f. 25.1.2018. The said exemption was initially made available up to 30.9.2018 which was then extended up to 30.9.2019. Simultaneously, the credit provisions have been amended to the effect that no reversal of credit would be required with respect to such exempted services. Thus,the said transporter would be able to avail the input tax credit with respect to such exempted activity.However, the input tax credit in the hands of shipper would be of no use if no other output taxable supplies are made by the shipper. Moreover, there is no refund mechanism available under GST law for such a scenario as the said transaction does not qualify as export of service.

So, GST suffered on input services by the Indian Cargo liners may become cost to them, which will ultimately be passed on to the exporters as a part of the freight charges. Therefore, in authors point of view, granting of exemption is not an ideal solution of the issue as while solving one issue it has created another. Thus, the industry should pursue for the appropriate and holistic redressal of the issue.