The goods and services tax (GST) authorities are currently scrutinizing the shipping industry for unpaid integrated GST (IGST) on ocean freight in the past. Additionally, investigations are underway regarding certain ocean liners that have been recording operational expenses under their foreign head offices instead of local branch offices.
The Directorate General of GST Intelligence is handling both of these matters, which could result in a substantial tax liability for the sector, estimated to be between Rs. 2 lakh crore and Rs. 2.5 lakh crore, according to experts.
To align with the Supreme Court’s ruling in the Mohit Minerals case, the government has exempted ocean freight from the 5% IGST as of October 1 this year.
In May 2022, the Supreme Court determined that separate IGST payment for services or freight is not required, if Indian importers pay IGST for the “composite supply” of goods and services, including the supply of services for Cost Insurance and Freight. Previously, importers were subject to a 5% IGST under the reverse charge mechanism, which was considered double taxation.
As the issue is under consideration for the conclusion by the finance ministry, experts point out that past cases are still being investigated by the DGGI.
A tax expert explained that even though the government has exempted payments for goods imported through ocean freight from the 5% percent of IGST starting from October 1, 2023, the matter remains debatable for cases prior to this date. The DGGI has already started scrutinizing multiple ocean freight liners and is seeking to recover past dues, according to the expert.
Furthermore, foreign shipping liners operating under the branch model in India are allegedly being investigated by the DGGI for evading taxes on imported services. This is due to their practice of attributing operational costs such as rent and salaries to their head office. Under GST laws, this is considered an import of services and is subject to taxation.
Sources indicate that shipping liners are in discussions with the finance ministry regarding both issues and are expecting some relief. However, the final decision on these matters is still to be reached.