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Editorial: Still Not Smooth Sailing

Chennai, 13 July 2022:

With the vision of progressing towards “Digital India”, GST digitised the way one conducts business and reports the same to the government. From the generation of invoices to return compliances and refund claims, each step of the business reporting has been digitised, ushering in the emergence of “digital tax administration” in India.

Shipping charges are applicable when goods are shipped (transported or delivered) to a buyer or an end-user. The seller adds this charge to the bill (to be borne/paid by the buyer). If the product in question is taxable, then there will be a tax on the shipping charges, too, depending on the rate of tax.

Under GST, tax on the shipping, freight, and logistic charges have changed. Under the erstwhile service tax system, when goods were transported through ships as cargo, the goods leaving the country were called exports and goods entering the country were imports.

The shipping charges on these goods attracted service tax. If the transportation happened through the air, both inbound and outbound shipments were not subject to service tax. The tax liability of terminal charges, warehousing, and cargo handling is determined based on the taxability of the principal service.

Under GST, the dealers convert logistics and freight forwarding into a supply of services (which includes the movement of goods through the sea, inland waterways, air, rail, or road). GST must be charged on the cumulative value of supply. If the freight charge is included, then GST on freight charges must be levied at the tax rate same as the rate charged on the supply of the goods or consignment.

The tax rate would accordingly take its source from the underlying item supplied if transportation charges are not separately given. However, as per the GST law, if the freight is exclusive and separately charged, then the GST rate on transportation service is 5%.

However, transportation of certain essential items is exempted under GST.The type of GST charged on freight forwarding is based on whether the transportation is national or international. If in the case of domestic freight, transportation happens from a place in India to another place in the country.

In this case, both points of origin and destination have to be inside the country. On international transportation, the international freight rules are applied. This applies if both the place of origin and destination are outside India, if one of them outside India, or both are outside India.

Thus, this impacts the “Place of Supply” provision to determine the taxability of cross-border and inter-state transactions. Earlier to the implementation of GST, a manufacturer had to set up warehouses in multiple locations, although he was based out of different states to avoid CST levy and state entry taxes.

The goods from his manufacturing plant would reach his own warehouses across the country, before reaching distributors and retailers. This led to higher operating costs. Under GST, manufacturers have cut down on the number of warehouses, and because of this, warehouses now have to handle a larger input.

This makes the manufacturers use a larger truck, to carry the higher tonnage of goods. It will work out to be economical and be efficient to operate, from the manufacturer’s point of view.

Amazon, for example, has hiked the easy shipping charge from 15% to 18% (service charge), under GST. When you buy a product that falls under the 5% GST bracket, the shipping charge will be 5%. If the product falls under the 18% bracket, then the shipping charge will be 18%. Please note that GST rate is charged depending on which bracket that product will fall under GST, i.e., 5%, 18%, 28%, etc.

The government also exempted outbound ocean freight towards transportation of goods from India to outside India by sea, without reversal of input tax credit. However, this exemption has a sunset clause, presently up to 30 September 2022. While this eliminates the tax on output, it leads to credit accumulation in the hands of shipping lines.

From a classification perspective, better clarity on the multimodal transport category is required. For ocean freight-related exemption with input credit, a possible solution to avoid credit accumulation could be to zero-rate such outbound ocean freight, thereby allowing a refund of the input tax credit.

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