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GST on transportation services – navigating through turbulent waters

GST on services by way of transportation of goods by aircraft / vessel is certainly on a roller-coaster ride these days. The story began in September 2022, when the GST exemption pertaining to goods transportation services witnessed a sunset from 1 October 2022 onwards.

This resulted in taxing the transportation of export cargo by the Indian transporters / freight forwarders, liable to Integrated GST (IGST). This created a lot of buzz amongst the exporters as well as the Indian transporters /freight forwarders. Consequently, owing to the hardships faced, various associations and trade bodies filed representations before the Government against such withdrawal of GST exemption.

The following challenges were being faced by the Indian transporters / freight forwarders: a) As per the GST law, the place of supply for export cargo was the destination of such goods, i.e., place outside of India. Due to this, question arose as to whether the exporters in India could claim input tax credit (ITC) of the GST so collected by the transporters / freight forwarders since it was believed that such credit could only be taken at the place of supply. The exporters, nevertheless, took a chance and rightly so, as principally it did not make sense to deny the benefit of ITC which culminated into refund to exporters when exports are zero-rated.

b) The larger issue was that Indian transporters / freight forwarders became uncompetitive as compared to the foreign transporters / freight forwarders, given that the place of supply for export cargo for the latter would be destination of goods.

Given this, the CBIC, pursuant to the decision in 48 th GST Council meeting, cleared the air on point a) above by issuing a clarification that ITC shall be eligible even if the place of supply was outside India. This is also being provided the legislative blessing by way of an amendment through the Finance Bill, 2023.

Accordingly, it can be observed that hitherto, the export transactions where the location of both the transporter / freight forwarder as well as the service recipient was in India, straightaway attracted IGST irrespective of the location of the recipient. Going forward, such transactions shall attract CGST + SGST or IGST, basis the location of recipient.

This amendment, however, did not resolve the larger issue which was impacting the logistics industry adversely. The stakeholders in the Government were in no mood to re-introduce the exemption allowed till September 2022. However, to everyone’s surprise, the GST Council in its 49 th meeting held few days ago, recommended to delete the relevant GST provisions thereby subtly correcting the disparity between Indian and foreign logistics industry. The said amendment shall now allow export benefits to Indian transporters / freight forwarders rendering transportation services to foreign exporters / agents, as they shall be entitled to benefits of zero rating on satisfaction of other conditions.

It is noteworthy that transportation services for import shipments through aircraft already enjoy exemption from GST; however, the supplier is warranted to reverse proportionate ITC to the extent of inward supplies used vis-à-vis the aforesaid exempted supplies. By virtue of this change, such reversals would also not be required.

Apart from the above, another implication of the proposed amendment would be that if the exporter from India choses a foreign transporter, then he has to discharge GST on reverse charge basis. Whereas, if an Indian service provider is appointed, then GST would be discharged by the service provider for which the exporter can continue to enjoy extended credit period prevalent in market. Hence, this amendment may not be a perfect solution for Indian logistics industry, but at least they may become a preferred choice for exporters.

To summarise, the impact of the proposed amendment is discussed below:
1. Where location of transporter is in India but the service recipient is outside India (foreign exporter / agent), the importation of goods by sea, which hitherto was liable to CGST + SGST or IGST, would now be zero-rated (subject to fulfilment of other conditions).

2. Where location of transporter is in India but the service recipient is outside India (foreign exporter / agent), the importation of goods by air, which hitherto was exempt from GST, would now be zero-rated (subject to fulfilment of other conditions). No ITC reversal would be warranted.

3. In case of export of goods, where the location of transporter is outside India but the recipient is in India, the transaction would now attract GST under reverse charge mechanism. This recommendation, however, needs to be passed in the Parliament before it is effective. We expect this proposal to be included in the Finance Bill, 2023 which is slated to be passed during the ongoing Budget session.

This is yet another instance showcasing that the concerned stakeholders in both the Central and the State Governments have ears on the ground and are responsive to business-critical issues. At the beginning, there was an apprehension as to how the machinery of Central and State Governments would jointly take decisions on the challenges / issues faced in a newly introduced indirect tax legislation with a vision of “One Nation One Tax”. However, the GST Council has been adept in addressing the industry concerns such as the present one and in the days to come, we hope that all vexatious issues are put to rest.

Patawari is Executive Director and Vora Senior Manager (Indirect Tax), Nexdigm

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