Applicability of GST on Ocean Freight

Applicability of GST on Ocean Freight. The shipping industry is the backbone of global trade, enabling the smooth transportation of goods across continents. Over 90% of international trade is carried out through ocean routes. In such a context, the applicability of GST on ocean freight has become a significant topic of discussion for businesses, importers, and tax professionals in India. This article explores the provisions related to GST on ocean freight, explains important GST sections, discusses transaction value types like CIF and FOB, highlights relevant notifications, and analyzes a landmark Gujarat High Court judgment.
What is Ocean Freight?
Ocean freight refers to the transportation of goods and cargo via sea routes using shipping vessels. It is the most cost-effective method for transporting large volumes of goods internationally. This type of freight can be used for a wide range of products—from machinery and automobiles to raw materials and everyday consumer goods. The responsibility of arranging and paying for the freight service can lie either with the importer or the foreign supplier, depending on the contract terms—commonly defined as either CIF or FOB.
GST on Ocean Freight
Goods and Services Tax (GST) is a destination-based indirect tax applied on the supply of goods and services in India. The applicability of GST on ocean freight was a subject of uncertainty and multiple legal challenges over the years. Initially, the Central Board of Indirect Taxes and Customs (CBIC) introduced certain notifications that brought ocean freight under the reverse charge mechanism. However, these were challenged in courts due to issues like double taxation, extra-territorial jurisdiction, and legal overreach.
Sections of GST Law Governing Ocean Freight
Several sections of the CGST and IGST Acts are relevant when analyzing the applicability of GST on ocean freight. Let us understand them in detail:
1. Section 5(3) of the IGST Act
This section empowers the Government to notify categories of supply that are subject to GST under the reverse charge mechanism (RCM). Under RCM, the recipient of goods or services, instead of the supplier, is liable to pay GST. Ocean freight services were initially included under this provision, making importers liable to pay IGST at 5% on ocean freight.
2. Section 2(93) of the CGST Act
This section defines the term "recipient" of a supply. According to this definition, the recipient can be:
• The person who is liable to pay consideration when consideration is payable.
• The person to whom the service is provided, even if no consideration is payable.
• The person to whom goods are delivered, even without any consideration.
This definition plays an important role in determining the applicability of GST on ocean freight, especially in distinguishing between CIF and FOB contracts.
Important Notifications Related to GST on Ocean Freight
Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June 2017
This notification listed certain services for which the tax liability would be on the recipient under RCM. Ocean freight for the transportation of goods by a vessel from a place outside India to the Indian customs clearance station was included. In simpler terms, the importer had to pay IGST at 5% on such ocean freight.
Notification No. 8/2017 – Integrated Tax (Rate) dated 26th September 2023
This notification superseded the earlier one and exempted the levy of GST on ocean freight from 1st October 2023. The government removed the phrase “services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India,” thereby ending the applicability of RCM on ocean freight.
Import Based on Transaction Value: CIF vs. FOB
When goods are imported, the value can either be CIF or FOB, which significantly impacts the applicability of GST on ocean freight.
1. CIF (Cost, Insurance, and Freight)
In a CIF agreement, the foreign supplier arranges and pays for the ocean freight and insurance to transport the goods to India. The total value of the goods, including freight and insurance, is charged as one lump sum.
• In such cases, the importer does not contract with the shipping line directly.
• The foreign supplier is responsible for the transport and payment to the shipping line.
• Thus, the importer is not considered the recipient of the transportation service as per Section 2(93) of the CGST Act.
• Hence, GST under RCM should not be applicable on such CIF imports.
2. FOB (Free on Board)
Under FOB terms, the foreign supplier delivers the goods to the port in their country, and the importer arranges and pays for ocean freight from that point onwards.
• Here, the importer contracts with the shipping line.
• The importer is also the one who pays for the transport service.
• Thus, the importer becomes the “recipient” of the service under GST law.
• In such cases, if the shipping line is located in a non-taxable territory, the importer is liable to pay GST under RCM.
• If the shipping line is located in India, then it must pay GST on a forward charge basis.
Customs Duty and IGST on Freight
Another major concern in the discussion on GST on ocean freight is the issue of double taxation.
• When goods are imported, customs duty is levied on the assessable value, which includes the value of goods, freight, and insurance.
• IGST is also levied on this assessable value.
• If GST is again charged on the freight component under reverse charge, it results in taxing the same element twice, which is neither fair nor constitutional.
Landmark Judgment: Mohit Minerals vs Union of India (Gujarat High Court)
One of the most notable legal decisions that changed the course of the applicability of GST on ocean freight was the judgment in Mohit Minerals Pvt Ltd vs UOI.
Background
• Mohit Minerals was importing coal on a CIF basis.
• The importer had already paid customs duty and IGST on the assessable value (which included freight).
• As per the earlier GST notification, the importer was also being asked to pay IGST at 5% on ocean freight under RCM.
• The company filed a writ petition before the Gujarat High Court challenging this double taxation.
Key Issues Addressed in the Judgment
1. Double Taxation
The court held that charging IGST on the freight amount separately, when it was already included in the assessable value for customs duty, led to double taxation, which is unconstitutional.
2. Extra-territorial Jurisdiction
The court observed that in CIF contracts, both the foreign supplier and the shipping line are outside India. Thus, the service (transportation) is provided and received entirely in a non-taxable territory. Therefore, India has no jurisdiction to levy GST on such transactions.
3. Recipient of Service
The court also ruled that the importer is not the recipient of the ocean freight service in a CIF contract. The service is availed by the foreign supplier. Therefore, RCM cannot be applied to the importer under Section 2(93) of the CGST Act.
4. Validity of Notifications
The court stated that the notifications issued by the CBIC (8/2017 and 10/2017) were subordinate legislation. Since they created tax liability without statutory backing, they were declared ultra vires the IGST Act and unconstitutional.
Clarification Regarding FOB Transactions
While the Gujarat High Court judgment provided clarity in the case of CIF transactions, it did not provide a direct ruling on FOB transactions.
• In FOB cases, since the importer is the direct recipient of the freight service, the reasoning used in CIF contracts may not fully apply.
• Therefore, the applicability of GST on ocean freight in FOB contracts still remains subject to interpretation and may need further clarification from the courts or the GST Council.
Recent Exemption from October 2023
In a welcome move, the CBIC issued Notification No. 8/2017 (Amended), which exempts ocean freight from GST under RCM with effect from 1st October 2023.
• This step eliminates the risk of double taxation.
• It aligns with the principles of fairness and reduces compliance burden on importers.
• However, businesses are still advised to review their contracts and seek professional advice, especially in the case of FOB shipments.
Conclusion
The applicability of GST on ocean freight has undergone several changes since the inception of GST. The initial notifications aimed to tax importers under the reverse charge mechanism, even in CIF transactions. This led to confusion, litigation, and double taxation.
The Gujarat High Court judgment in the Mohit Minerals case provided clarity by holding that:
• CIF-based freight services are not liable to GST under RCM,
• Double taxation is unconstitutional,
• And both the service provider and recipient being outside India removes the transaction from the scope of Indian GST law.
The government eventually accepted the judgment's reasoning and exempted ocean freight from GST under RCM from October 1, 2023. However, importers must still remain cautious about their contract types (CIF vs FOB) and stay updated with the latest GST circulars and clarifications.
For now, this exemption is a relief for the trading community, removing a long-standing confusion and ensuring that businesses are not burdened with unnecessary tax liabilities on international shipping.
Frequently Asked Questions (FAQs)
Q1. What is IGST on Ocean Freight and who is liable to pay it?
Ans. Prior to recent exemptions, IGST (Integrated Goods and Services Tax) was levied on the value of ocean freight services for importing goods into India. The Indian importer, considered the recipient of the service, was liable to pay the IGST under a reverse charge mechanism, not the foreign shipping company.
Q2. What were the applicable GST rates on Ocean Freight before the exemption?
Ans. Importers had two options: either pay 5% IGST without claiming Input Tax Credit (ITC) or pay 18% IGST with the option to claim ITC.
Q3. What is the significance of Notification No. 08/2023-Integrated Tax (Rate)?
Ans. This notification, dated September 26, 2023, brought about a crucial exemption from IGST on ocean freight for imported goods, effective from October 1, 2023. It amended the earlier Notification No. 10/2017, removing "services by way of transportation of goods by a vessel" from the purview of the reverse charge mechanism.
Q4. How does the recent exemption impact importers?
Ans. Importers are no longer obligated to pay IGST on ocean freight for goods imported into India. This exemption is expected to reduce overall import costs and simplify compliance procedures related to ocean freight.
Q5. What is the Reverse Charge Mechanism (RCM) in the context of Ocean Freight?
Ans. RCM is a mechanism where the recipient of the service (in this case, the Indian importer) is liable to pay the GST, rather than the supplier (the foreign shipping company). This was used to streamline tax collection from foreign entities before the exemption.

The shipping industry is the backbone of global trade, enabling the smooth transportation of goods across continents. Over 90% of international trade is carried out through ocean routes. In such a context, the applicability of GST on ocean freight has become a significant topic of discussion for businesses, importers, and tax professionals in India. This article explores the provisions related to GST on ocean freight, explains important GST sections, discusses transaction value types like CIF and FOB, highlights relevant notifications, and analyzes a landmark Gujarat High Court judgment.

What is Ocean Freight?

Ocean freight refers to the transportation of goods and cargo via sea routes using shipping vessels. It is the most cost-effective method for transporting large volumes of goods internationally. This type of freight can be used for a wide range of products—from machinery and automobiles to raw materials and everyday consumer goods. The responsibility of arranging and paying for the freight service can lie either with the importer or the foreign supplier, depending on the contract terms—commonly defined as either CIF or FOB.

GST on Ocean Freight

Goods and Services Tax (GST) is a destination-based indirect tax applied on the supply of goods and services in India. The applicability of GST on ocean freight was a subject of uncertainty and multiple legal challenges over the years. Initially, the Central Board of Indirect Taxes and Customs (CBIC) introduced certain notifications that brought ocean freight under the reverse charge mechanism. However, these were challenged in courts due to issues like double taxation, extra-territorial jurisdiction, and legal overreach.

Sections of GST Law Governing Ocean Freight

Several sections of the CGST and IGST Acts are relevant when analyzing the applicability of GST on ocean freight. Let us understand them in detail:

1. Section 5(3) of the IGST Act

This section empowers the Government to notify categories of supply that are subject to GST under the reverse charge mechanism (RCM). Under RCM, the recipient of goods or services, instead of the supplier, is liable to pay GST. Ocean freight services were initially included under this provision, making importers liable to pay IGST at 5% on ocean freight.

2. Section 2(93) of the CGST Act

This section defines the term "recipient" of a supply. According to this definition, the recipient can be:

• The person who is liable to pay consideration when consideration is payable.

• The person to whom the service is provided, even if no consideration is payable.

• The person to whom goods are delivered, even without any consideration.

This definition plays an important role in determining the applicability of GST on ocean freight, especially in distinguishing between CIF and FOB contracts.

Important Notifications Related to GST on Ocean Freight

Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June 2017

This notification listed certain services for which the tax liability would be on the recipient under RCM. Ocean freight for the transportation of goods by a vessel from a place outside India to the Indian customs clearance station was included. In simpler terms, the importer had to pay IGST at 5% on such ocean freight.

Notification No. 8/2017 – Integrated Tax (Rate) dated 26th September 2023

This notification superseded the earlier one and exempted the levy of GST on ocean freight from 1st October 2023. The government removed the phrase “services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India,” thereby ending the applicability of RCM on ocean freight.

Import Based on Transaction Value: CIF vs. FOB

When goods are imported, the value can either be CIF or FOB, which significantly impacts the applicability of GST on ocean freight.

1. CIF (Cost, Insurance, and Freight)

In a CIF agreement, the foreign supplier arranges and pays for the ocean freight and insurance to transport the goods to India. The total value of the goods, including freight and insurance, is charged as one lump sum.

• In such cases, the importer does not contract with the shipping line directly.

• The foreign supplier is responsible for the transport and payment to the shipping line.

• Thus, the importer is not considered the recipient of the transportation service as per Section 2(93) of the CGST Act.

• Hence, GST under RCM should not be applicable on such CIF imports.

2. FOB (Free on Board)

Under FOB terms, the foreign supplier delivers the goods to the port in their country, and the importer arranges and pays for ocean freight from that point onwards.

• Here, the importer contracts with the shipping line.

• The importer is also the one who pays for the transport service.

• Thus, the importer becomes the “recipient” of the service under GST law.

• In such cases, if the shipping line is located in a non-taxable territory, the importer is liable to pay GST under RCM.

• If the shipping line is located in India, then it must pay GST on a forward charge basis.

Customs Duty and IGST on Freight

Another major concern in the discussion on GST on ocean freight is the issue of double taxation.

• When goods are imported, customs duty is levied on the assessable value, which includes the value of goods, freight, and insurance.

• IGST is also levied on this assessable value.

• If GST is again charged on the freight component under reverse charge, it results in taxing the same element twice, which is neither fair nor constitutional.

Landmark Judgment: Mohit Minerals vs Union of India (Gujarat High Court)

One of the most notable legal decisions that changed the course of the applicability of GST on ocean freight was the judgment in Mohit Minerals Pvt Ltd vs UOI.

Background

• Mohit Minerals was importing coal on a CIF basis.

• The importer had already paid customs duty and IGST on the assessable value (which included freight).

• As per the earlier GST notification, the importer was also being asked to pay IGST at 5% on ocean freight under RCM.

• The company filed a writ petition before the Gujarat High Court challenging this double taxation.

Key Issues Addressed in the Judgment

1. Double Taxation

The court held that charging IGST on the freight amount separately, when it was already included in the assessable value for customs duty, led to double taxation, which is unconstitutional.

2. Extra-territorial Jurisdiction

The court observed that in CIF contracts, both the foreign supplier and the shipping line are outside India. Thus, the service (transportation) is provided and received entirely in a non-taxable territory. Therefore, India has no jurisdiction to levy GST on such transactions.

3. Recipient of Service

The court also ruled that the importer is not the recipient of the ocean freight service in a CIF contract. The service is availed by the foreign supplier. Therefore, RCM cannot be applied to the importer under Section 2(93) of the CGST Act.

4. Validity of Notifications

The court stated that the notifications issued by the CBIC (8/2017 and 10/2017) were subordinate legislation. Since they created tax liability without statutory backing, they were declared ultra vires the IGST Act and unconstitutional.

Clarification Regarding FOB Transactions

While the Gujarat High Court judgment provided clarity in the case of CIF transactions, it did not provide a direct ruling on FOB transactions.

• In FOB cases, since the importer is the direct recipient of the freight service, the reasoning used in CIF contracts may not fully apply.

• Therefore, the applicability of GST on ocean freight in FOB contracts still remains subject to interpretation and may need further clarification from the courts or the GST Council.

Recent Exemption from October 2023

In a welcome move, the CBIC issued Notification No. 8/2017 (Amended), which exempts ocean freight from GST under RCM with effect from 1st October 2023.

• This step eliminates the risk of double taxation.

• It aligns with the principles of fairness and reduces compliance burden on importers.

• However, businesses are still advised to review their contracts and seek professional advice, especially in the case of FOB shipments.

Conclusion

The applicability of GST on ocean freight has undergone several changes since the inception of GST. The initial notifications aimed to tax importers under the reverse charge mechanism, even in CIF transactions. This led to confusion, litigation, and double taxation.

The Gujarat High Court judgment in the Mohit Minerals case provided clarity by holding that:

• CIF-based freight services are not liable to GST under RCM,

• Double taxation is unconstitutional,

• And both the service provider and recipient being outside India removes the transaction from the scope of Indian GST law.

The government eventually accepted the judgment's reasoning and exempted ocean freight from GST under RCM from October 1, 2023. However, importers must still remain cautious about their contract types (CIF vs FOB) and stay updated with the latest GST circulars and clarifications.

For now, this exemption is a relief for the trading community, removing a long-standing confusion and ensuring that businesses are not burdened with unnecessary tax liabilities on international shipping.

Frequently Asked Questions (FAQs)

Q1. What is IGST on Ocean Freight and who is liable to pay it?

Ans. Prior to recent exemptions, IGST (Integrated Goods and Services Tax) was levied on the value of ocean freight services for importing goods into India. The Indian importer, considered the recipient of the service, was liable to pay the IGST under a reverse charge mechanism, not the foreign shipping company.

Q2. What were the applicable GST rates on Ocean Freight before the exemption?

Ans. Importers had two options: either pay 5% IGST without claiming Input Tax Credit (ITC) or pay 18% IGST with the option to claim ITC.

Q3. What is the significance of Notification No. 08/2023-Integrated Tax (Rate)?

Ans. This notification, dated September 26, 2023, brought about a crucial exemption from IGST on ocean freight for imported goods, effective from October 1, 2023. It amended the earlier Notification No. 10/2017, removing "services by way of transportation of goods by a vessel" from the purview of the reverse charge mechanism.

Q4. How does the recent exemption impact importers?

Ans. Importers are no longer obligated to pay IGST on ocean freight for goods imported into India. This exemption is expected to reduce overall import costs and simplify compliance procedures related to ocean freight.

Q5. What is the Reverse Charge Mechanism (RCM) in the context of Ocean Freight?

Ans. RCM is a mechanism where the recipient of the service (in this case, the Indian importer) is liable to pay the GST, rather than the supplier (the foreign shipping company). This was used to streamline tax collection from foreign entities before the exemption.