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Introduction

The shipping sector plays a crucial role in facilitating global freight transportation and supporting the interconnectedness of global trade supply chains.  Oceans serve as the primary channel for over 90% of the world’s trade, offering a cost-effective and efficient means of transporting goods over vast distances.  Compared to alternative modes such as rail, road, and air transport, shipping stands out for its ability to carry large volumes of cargo at significantly lower costs.

What is Ocean Freight?

Ocean freight involves the logistical processes associated with exporting and importing cargo through shipping lines. During ocean freight shipping, merchandise is carefully packed into shipping containers, and a freight forwarder arranges for the booking of containers or space with the shipping agent. The shipment progresses to the port, undergoes customs clearance at the point of origin, and is then transported to the recipient. Delivery to the recipient occurs either on a CIF (Cost, Insurance, Freight) basis or an FOB (Free on Board) basis.

CIF Contracts: – The seller is obligated to cover the costs of freight, including insurance, to deliver the goods to the designated port of destination. However, the risk shifts to the buyer as soon as the goods are loaded onto the ship.

FOB Contracts: – The seller is responsible for transporting the goods to the port of shipment and bearing the cost of loading. The buyer assumes the expenses related to ocean freight, insurance, unloading, and transportation from the arrival port to the final destination. The seller transfers the risk to the buyer upon loading the goods at the originating port.

Ocean freight is typically categorized into two types based on the destination of goods or cargo, firstly, ocean freight concerning the export of goods and the second being, ocean freight concerning the import of goods.

Supreme Court’s Judgment in case of Union of India vs. Mohit Minerals Pvt. Ltd

On May 19, 2022, the Supreme Court of India, in the case of Union of India Vs. Mohit Minerals Pvt. Ltd., determined that an Indian importer is exempt from the reverse charge mechanism for Integrated Goods and Services Tax (IGST) on foreign vendor payments for ocean freight.  This exemption is based on the grounds that the importer is already obligated to pay IGST as part of customs duty on the CIF value of the imported goods. The court’s decision upheld the 2020 ruling of the Gujarat High Court.

The IGST law originally mandated the imposition of GST under reverse charge on the freight component when goods are imported into India under a CIF contract.  Furthermore, the importer was required to pay customs duty on the CIF value, which already included the freight cost.  This resulted in a dual taxation of the freight element, firstly as IGST on the “service” under reverse charge and secondly as customs duty on the imported “goods.”

Current Status

Starting from October 1, 2023, the Government has granted an exemption on payments associated with goods imported through ocean freight, relieving them from the 5% IGST, under the authority granted by the Integrated Goods and Services Tax Act, 2017 (IGST Act), To resolve the taxation dispute concerning ocean freight in CIF contracts, the CBIC issued Notification Nos. 11/2023 and 13/2023-Integrated Tax (Rate), both dated September 26, 2023. These notifications brought about the following changes:

Notification	Changes Made	Before	After
11/2023-Integrated Tax (Rate)	Omitted the words relating to services provided by a person located in a non-taxable territory to a person located in a non-taxable territory for transportation of goods by vessel from outside India to the customs station in India	Ocean freight from non-taxable territory to non-taxable territory included	Excluded ocean freight from non-taxable territory to non-taxable territory
13/2023-Integrated Tax (Rate)	Omitted Sl. No. 10 of Reverse Charge Service Notification	Included services of transportation of goods by vessel from outside India to customs station in India under reverse charge	Excluded services of transportation of goods by vessel from outside India to customs station in India under reverse charge

Effective from October 1, 2023, the Indian Government has exempted ocean freight on the import of goods from IGST.  This decision follows a Supreme Court ruling in the Mohit Minerals case, which determined that Indian importers are liable to pay IGST on the composite value of imported goods, including the FOB value, freight, and insurance. As a result, levying IGST separately on ocean freight services under the Reverse Charge Mechanism (RCM) is deemed inconsistent with GST provisions. Amendments to the IGST Act have been made to align with the Supreme Court’s judgment, including the deletion of GST rates on ocean freight for import and the removal of provisions for IGST payment under RCM for ocean freight transportation. These changes aim to ensure compliance with GST regulations and streamline taxation processes for imported goods.

Taxability of the different scenarios of outbound shipping services (Ocean Freight on Export of goods) and Inbound Shipping Services (Ocean Freight on import of goods) post issue of Notification w.e.f. October 1, 2023, summarized below –

Scenario	GST Liability
Export of goods from India, both service receiver and liner/agent within India	Exempt until September 2022 (from January 25, 2018, to September 30, 2022, vide 02/2018-Integrated Tax (Rate)) Taxable w.e.f. October 01, 2022, under forward charge
Export of goods from India, Service receiver in India and liner/agent located outside India	Exempt until September 2022 (from January 25, 2018, to September 30, 2022, vide 02/2018-Integrated Tax (Rate)) Taxable w.e.f. October 01, 2022, under RCM
Export of goods, Service receiver is outside India, liner/agent within India	No GST liability if qualifies as export of service fulfilling specified conditions. Taxable under forward charge if export conditions are not fulfilled
Export of goods from outside India, both service receiver and liner/agent outside India	Outside the scope of GST in India
Import of goods, both service receiver and liner/agent within India	GST under forward charge
Import of goods, service receiver within India, liner/agent outside India	GST under RCM
Import of goods, service receiver outside India, liner/agent within India	No GST liability if qualifies as export of service fulfilling specified conditions. Taxable under forward charge if export conditions are not fulfilled
Import of goods, both service receiver and liner/agent outside India	No GST w.e.f. October 1, 2023, Importer is required to pay IGST as a component of customs duty

Conclusion:

The amendments made under the IGST Act aim to align the provisions of GST law with the judgment of the Hon’ble Supreme Court in the Mohit Minerals case.  These changes were made to address the taxation dispute regarding ocean freight in CIF contracts and align with the judgment of the Hon’ble Supreme Court in the Mohit Minerals’ case. These measures seek to ensure compliance with GST regulations and streamline taxation processes for imported goods.