India: Export Air/Ocean Freight Component Of A Multimodal Transportation Contract - Retrospective Exemption

The taxability of services of transportation of goods has undergone a series of rapid changes in the short period since the introduction of the Goods and Services Tax in India. Under the erstwhile service tax regime, services of transportation of goods from India to a foreign territory i.e. export freight were not taxable since the place of provision of such services was outside India. However, such services are now exigible to tax under GST. Subsequent to representations regarding increased burden of tax incidence leading to increase in overall export costs, Notification No. 2/2018-CT(R) was issued with effect from 25th January, 2018 to exempt export air freight and export ocean freight with a sunset clause, which was later extended up to 30th September, 2019.

In the larger picture of the global logistics sector, the principal services are often provided in the form of multimodal transportation i.e. in international shipping, goods are bound to be transported by more than a solitary means of movement until their final destination. Transporters registered as multimodal transport operators issue a multimodal transport document (MTD) in respect of such movement which makes them contractually liable for the entirety of the transportation of the goods over several modes. In the absence of a uniform tax rate for transportation services, every individual mode used to be taxed at a different rate, or at a singular rate in line with the predominant service, basis the existence of a composite multimodal transportation contract.

This being the existing practice, the GST Council in its 28th meeting proposed a composite rate for services of multimodal transportation of goods which was notified at 12% by Notification No. 13/2018-CT(R) with effect from 27th July, 2018. The entry created a uniform levy of tax without carving out any qualifications as to the mode of transport or the nature of consignment being import or export - a considerable leap from the applicable concessional rates and exemptions in force previously.

The 12% GST rate, despite co-existing with lower rates for unimodal transportation, was to be mandatorily adopted for multimodal transportation services on account of being a specific provision overriding the other general entries. It led to the creation of a scenario wherein the same activity of transportation of goods by air or by sea was found liable to considerably distinct tax rates depending upon whether it was performed separately or as part of a multimodal transportation contract. The insertion of the new rate, perhaps in pursuit of introducing the convenience of a uniform rate, however, only served to increase the concerns of the industry.

Relief was finally granted by Notification No. 30/2018-CT (R) dated 31st December, 2018 by way of addition of an explanation against the entry above stating that nothing contained therein would apply to multimodal transport services "other than by way of transport of goods from a place in India to another place in India". The scope of the entry, therefore, has now been considerably restricted to transportation of goods within the territory of India, to the cogent exclusion of import as well as export consignments. It is of particular note that the notification is published under section 11(3) of the Central Goods and Services Tax Act, 2017 which reads as under:

"The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be."

From the above, it is clear that every explanation inserted in a notification shall have retrospective application- a move that provides relief to the industry which had largely adopted the practice of maintaining existing individual rates and refraining from charging the composite rate of 12%. Curiously however, Notification No. 30/2018-CT (R) dated 31st December 2018, clause 3 itself provides for the effective date of the insertion to be 1st January, 2019. It appears, therefore, that the aforesaid notification has been issued contrary to the very provision under which it has been issued i.e. section 11(3) of the CGST Act. The Act contemplates retrospective application for every such explanation inserted in a notification inasmuch as it is to take effect from the date of the original notification.

Notification No. 30/2018-CT (R) may, therefore, be rendered ultra vires the Act, to the extent that it prescribes the date of its applicability to be from 1st January, 2019. And same would be fate of the analogous notifications31/2018-IT(R) and 30/2018-UTT(R).

Perhaps, it was a copy paste devil as all the rate notifications issued on 31st December 2018, namely 24/2018-CTR to 30/2018-CTR and those under IGST Act, 2017 and UTGST Act, 2017 carry the following identical line as its last clause viz. "This notification shall come into force on the 1st January, 2019."

Be that as it may, the transporters who have already charged the higher rate of 12% on multimodal transportation contracts may consider the possibility of issuing a credit note to reduce the differential GST charged.

Originally published by

© 2018, Vaish Associates Advocates,
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