An exemption from India's service tax for services provided, or agreed to be provided, by a party located outside India (i.e. in non-taxable territory) to a another party also located outside India, for the carriage of goods by sea from a place outside India up to a customs clearance station in India, was withdrawn following the introduction of "Notification No. 1/2017 – Service Tax" dated 12 January 2017.
Effect of Notification No. 1/2017
With effect from 22 January 2017, overseas exporters chartering foreign vessels for the purpose of supplying goods to India will now be liable for service tax on freight/hire, including in situations where both the service provider and the service recipient are located outside India.
Further, as per "Notification no. 2/2017 – Service Tax" dated 12 January 2017, the party in charge of the vessel (if located in India) or an agent appointed by him (if located outside India) would be liable to pay service tax at the rate of 4.5 percent of gross earnings on import freight/hire into India. This is currently levied on free-on-board (FOB) cargoes, where the ship is chartered by a local buyer.
To safeguard the owner of the ship, it is advised that a clause should be added to declare the charterer (being the person in charge of the vessel) as the agent of the owner for the purpose of discharging service tax liability under the Indian laws.