Amended 1994 Service Tax Rules

February 28, 2017 – 08:00

The Indian government has promised to make doing business easier by attempting to reduce logistical costs and barriers to trade, so the implementation of this latest tax baffles many observers. The Indian Government amended the 1994 Service Tax Rules with a 2017 inclusion which saw the implementation of a 4.5% Service Tax on pre-paid freight into India as of 22 Jan., 2017. India’s Service Tax Rules 1994 are an indirect tax levied on services, and import freight charges have been subject to the tax for all collect shipments since June 2016, with exemptions for freight prepaid shipments. Under this 2017 amendment, the exemption for freight prepaid shipments has been withdrawn, making them also subject to service tax, thereby bringing the foreign supplier who chartered the vessel into the service tax net. This tax is supposed to be collected by the service provider who is recovering the amount from the service recipient. In the context of international freight, both the shipper as well as the consignee can be considered as recipients of services. This has led to some confusion surrounding who actually pays the tax, and forwarders are concerned over foreign entities outside the Indian tax regime collecting taxes.

With logistics services contracted and paid outside of India captured within this tax, there’s widespread confusion about how this could be applied to complex international supply chains given that the majority of transport providers broker deals with shippers through independent forwarding agents or liners’ brokerage firms without sharing the costs with Indian counterpart and the onus on the ship agent filing manifest data to pay the tax. Also, a taxable person who is part of the tax regime, pays Service Tax and can use it as tax credit in the form of CENVAT credit. Thereby a trader who is established in the territory can recover the taxes paid. This is not possible for a person outside of the tax regime. Inevitably this will increase the cost of doing business in India, even if the Charterers negotiate the freight tax into the Owner’s account, the Owner would factor this into the freight cost. But apart from this additional cost, the lack of clarity regarding the tax on prepaid freight and other charges has created procedural issues for shippers and transport providers.

Another issue is that the new rule came into force 10 days after publication and the speed with which it was implemented has meant no one in the trade has been able to react and deal with the changes.

The International Federation of Freight Forwarders Associations, (FIATA), has asked Indian authorities to clarify how the service tax would apply to transactions between two foreign entities that are outside of the local tax regime. But in the meantime, it has recommended members lobby their governments and relevant authorities and refuse to pay the service tax to shipping lines and instead advise collecting at destination or from the consignee who are able to take advantage of tax credits. In fact, there are shipping lines that have already agreed to collect the Service Freight on prepaid shipment to India at destination. So far, the government of India has turned down pleas from shipper and trade groups to review the notification.

Photo Credit: Shutterstock


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