Indian authorities have recently extended the service tax on ocean freight, payable under the Finance Act 1994 (“Service Tax”), to cargoes imported on a CIF basis. The amendments to the Act in this regard came into effect from 22 January 2017.
This Service Tax has been levied since June 2016 over freight on cargoes imported on an FOB basis, including where ships have been chartered by importers domiciled in India. But it was not applicable where transportation services were provided from a place outside India to a port in India by a foreign shipping line at the request of a foreign shipper. The amendments are intended to correct this anomaly.
Who is liable in the first instance?
The determination of the point of taxation is the date of the bill of lading.
In relation to bills of lading which are dated from 22 January 2017 until 22 April 2017 it is the agent of the shipping line in India, (ie the party responsible for carrying the goods to the Indian port), who would be liable to pay Service Tax on the freight received. The agent would reclaim this from the shipping line as part of his service charges. The shipping line would then collect this from the overseas exporter. For bills of lading dated 23 April 2017 onwards, it is the importer (rather than the service provider) who is liable to pay the Service Tax.
Note it appears that the agent of the shipping line will remain liable for the Service Tax if the bills of lading for the goods are dated before 23 April 2017, even where the vessel arrives after such date.
The determination of rate of the Service Tax is inherently unclear. According to a recent attempt at clarification by the Department of Revenue, where the vessel owner is a non-Indian entity, not tax registered in India, the rate of Service Tax applicable is 15% of the ocean freight. However, if the Indian party to the transaction (Charterer or Importer) has not availed CENVAT credit under the local rules, then the applicable rate of Service Tax is 4.5% of the ocean freight. Where the importer is liable after 23 April 2017, he also has the option to pay 1.4% of the CIF value of the cargo. The Service Tax is not applicable to hire payable under time charter.
In relation to existing voyage charters and COAs, the following issues may arise:
- Reclaiming the Service Tax down the charterparty chain – do contractual provisions deal with this or is it necessary to rely on an implied indemnity to pass liability down the chain?
- The liability for Service Tax after 23 April 2017, is on the importer, rather than the “service provider”. The interpretation of “service provider” is unclear (as this could be the owner or disponent owner).
- How to deal with the evolving tax following conflicting interpretations and determination of the rate of tax – pay everything claimed by the agent/importer, or only what is currently owing. The risk to vessel owners is claimants such as agent or importer (as the case may be) arresting vessels, especially if the amount of Service Tax collected by them was insufficient to cover liability for the tax increase. Vessel owners need to ensure that their vessels are redelivered to them, by the party in the charterparty chain responsible for carrying the goods to the Indian port, free of potential tax liabilities / encumbrances.