India elevates service tax on import cargos to 4.5%

India elevates service tax on import cargos to 4.5%


India will impose service tax of 4.5% on freight Service over cargos delivered on a CFR basis. This order was issued last week and will be effective from 22 January.

The service tax was already being imposed since the month of June last year on all the cargos imported on the basis of FOB and also on the ships owned by importers who are domiciled in India.

The service tax breakdown

The breakdown of the tax is as follows:

4.2% service tax on imported goods and 0.15% for Swachh Bharat (Clean India) Cess and Krishi Kalyan (Farm Welfare) Cess each.

Tax to cover non-residents of India

The new notification issued last week removes the exemption given to non-resident service providers of freight. Previously, the Cargo delivery service tax was not applicable if the owner and charter of the ship were not residents of India.

When in June 2016, the contract of supply was on FOB basis and if the vessel was chartered by Indian importer, he was bound to pay the service tax. According to the new notification issued, any person who complies with Indian Customs Act is responsible of paying service tax. In the case of foreign ships, the agent of foreign ship operator is bound by this act from now on.

In the latest advancement the charterer and ship operator of cargo despite being located outside India are covered under the 4.5% service tax unit. Earlier, even the government had a hard time making the decision for CFR based freights.

In this scenario a foreign buyer chartered a foreign operator’s vessel and was out of the criteria of paying service tax. However, the custom duty was applicable on all the imported goods.

What will be the impact?

Bringing goods into the country via sea route will become costly now because of service tax net. This tax is an addition to the custom duty already imposed on imported products.

As a result, any cargo imported in India such as crude, coal, coke, refined petroleum products, gypsum, limestone, phosphoric acid and other such products will ultimately become costly.

Shipping experts are of the opinion that the proposed amendment is a way of double taxation. The adverse effect can lead to downward trend in companies from using Indian freight forwarders. This is not a good sign at all leading the burden on the end user

The new notification somewhat has created confusion among charterers and Indian ship owners to a certain degree. The standard charter party agreement states that all taxes on cargo voyage freights are to be fulfilled by the charterer’s account except income tax and taxes on time the charter hires levied in the country of vessel and/or his owner’s domicile.

All dues, duties, charges and/or taxes on crew and/or stores are to be for the owner’s account too. However, there are occasions where charterers bargain the freight tax to be included into the owner’s account. The owner factors the freight tax into the freight cost.

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