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Service tax on inbound freight could make imports costlier
March, 12th 2016

Bringing goods into the country via the sea route could become more expensive as the Union Budget 2016-17 has brought the activity into the service tax net, in addition to the customs duty levied on imports.

Shipping experts said this could lead to double taxation as customs duty is already levied on the imported goods and may discourage companies to use services of Indian freight forwarders.

“While it is double taxation, credit may be available. This may dissuade people from using services of Indian freight forwarders. Indian buyers may ask the exporters in other countries to use freight forwarders there and send the goods to India instead of using the services of freight forwarders in India,” said Bipin Sapra, Tax Partner, EY.

The imposition of service tax on inward transportation of goods through vessels in the Budget seems to be aimed at discouraging imports by making them more expensive.

“It will primarily increase the cost of imported goods. Ultimately, the shipping lines will pass it on to the end customers. It seems the intention of the government is to encourage exports and discourage imports,” said Hemant Bhattbhatt, Chief Executive Officer, HMSA Consultancy Services LLP. He, however, said the amendment also provides for an exemption as far as service tax is concerned for valuation for customs.

“The cascading effect has been avoided, meaning tax on tax will not be collected. There is a service tax element in the cost of the goods and customs duty will be charged on the entire cost of goods. There will be no customs duty on service tax. Both of them will apply, and in that sense, there is an element of double taxation,” Mr. Bhattbhatt added.

Anil Devli, CEO at Indian National Shipowners Association, said the cost of goods won’t be impacted as there will be a CENVAT credit or refund of tax paid on procuring goods or services.

“All the manufacturing companies have a large amount of CENVAT credit lying to their books. Therefore, when they pay service tax for freight they are actually not paying service tax in full. But it is tax minus the amount they have already paid. So it will not add to the cost of input and there will be no cash outflow for anybody,” Mr. Devli said.

He, however, adds that his concern stems out of the fact that whenever an Indian shipping company carries cargo for another domestic firm, service tax will have to be paid. However, an Indian company carrying cargo for foreign company will not pay the service tax as it will not fall under the jurisdiction of India. However, Mr. Bhatt said even if a foreign shipping company is transporting goods and bringing goods in India, they will also be charged under the reverse charge mechanism as goods will be imported into India.

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