With the advent of GST, a dozen central and state tax laws were subsumed, and the country saw the biggest tax reform in 75 years of independence. The major pre-GST tax component i.e. service tax was also subsumed. With the vision of progressing toward “Digital India”, GST digitized the way one conducts business and reports the same to the government. From the generation of invoices to return compliances and refund claims, each step of the business reporting has been digitized, ushering in the emergence of “digital tax administration” in India.
The indirect tax rates applicable to the logistics and shipping sector have increased under GST i.e. from the earlier 4.5% to 5% on import ocean freight, and from 15% to 18% on handling and other services. GST rate on bunker fuel was reduced to 5% from 18%, thereby reducing costs. Multimodal transport is taxable at 12%. While rates of tax have increased, the recoverability has also been improved. Therefore, such GST is generally a wash for businesses as input credits are permitted.
Under GST, the registrations got decentralised at the state level as against the earlier centralized service tax registration – thus increasing the number of compliances. E-way bills were introduced pan India w.e.f. April 2018. This has helped in substituting state boundary check posts and tracking the movement of goods. It also keeps the tax evasions in check.
The government also exempted outbound ocean freight towards transportation of goods from India to outside India by sea, without reversal of input tax credit. However, this exemption has a sunset clause, presently up to 30 September 2022. While this eliminates the tax on output, it leads to credit accumulation in the hands of shipping lines.
To enhance the competitiveness of Maintenance, Repair and Overhaul (MRO) services in respect of ships, vessels, and their engines and other components or parts, the GST rate on MRO services was reduced to 5% from the initial 18% in June 2021. Also, initially, MRO services provided to foreign vessels were not treated as ‘export of services’ despite receiving consideration in convertible foreign exchange. In June 2021, the place of supply regulations was to enable zero-rating on such MRO services.
In the future, some matters need to be addressed in this sector.
For instance, the import of ships or vessels in India is exempted from customs duty. However, from July 2017, a 5% IGST has been levied on the import of ships or vessels in India – which is quite substantial considering the value of the ship. The shipping sector is a high-volume, low-margin business. Thus, this 5% IGST results in considerable accumulation of input tax credit – significantly affecting the competitiveness of domestic shipping businesses i.e., Indian flagships vis-à-vis foreign counterparts. Thus, the government should relook at the policy and evaluate options like extending IGST exemption on the import of ships or vessels in India, like the erstwhile tax regime.
From a classification perspective, better clarity on the multimodal transport category is required. For ocean freight-related exemption with input credit, a possible solution to avoid credit accumulation could be to zero-rate such outbound ocean freight, thereby allowing a refund of the input tax credit.
Separately, to propel India to the forefront of the global maritime sector, the Ministry of Ports, Shipping and Waterways formulated the Maritime India Vision 2030 (MIV 2030) in February 2021 – a blueprint to ensure coordinated and accelerated growth of India’s maritime sector in this decade. The MIV 2030 has been prepared after extensive consultations with public and private sector stakeholders. The same identifies 150+ initiatives across the maritime sector including policy & regulatory measures required to support these initiatives.
Overall, the last 5 years have seen some key matters being addressed by the GST Council. This is a process of continuous evolution, and we are confident that regulations and processes will continue to be streamlined over some time.
(Divyesh Lapsiwala, Tax Partner, EY India and Uma Iyer, Tax Partner, EY India. With inputs from Shreerang Yadav and Chandni Vora)