GST: 5 years of GST: For shipping and logistics, some key issues have been resolved, but shipping is still not smooth
With the advent of the GST, a dozen central and state tax laws were subsumed, and the country saw the biggest tax reform in 75 years of independence. The main tax component before GST, ie the tax on services, has also been included. With the vision of moving towards “Digital India”, GST has digitized the way business is done and reports to the government. From invoice generation to compliance declarations and refund requests, every step of business reporting has been digitized, ushering in the emergence of “digital tax administration” in India.
Indirect tax rates applicable to the logistics and maritime transport sector have increased under the GST, i.e. from 4.5% to 5% on import ocean freight, and 15% to 18% on handling and other services. The GST rate on bunker fuel has been reduced from 18% to 5%, reducing costs. Multimodal transport is taxed at 12%. As tax rates have increased, collectability has also improved. Therefore, such a GST is usually a wash for businesses, as input credits are allowed.
Under the GST, registrations have been decentralized to the state level compared to the former centralized service tax registration, thus increasing the number of compliances. Electronic invoices were introduced across India in April 2018. This helped replace state border checkpoints and track the movement of goods. It also controls tax evasion.
The government has also exempted outbound sea freight for transporting goods from India to outside India by sea without cancellation of input tax credit. However, this exemption has a sunset clause, currently until September 30, 2022. Although this eliminates the tax on production, it results in a build-up of credits in the hands of shipping lines.
In order to improve the competitiveness of maintenance, repair and overhaul (MRO) services with respect to ships, vessels and their engines and other components or parts, the rate of GST on MRO services has been reduced to 5% compared to 18% initially in June 2021. In addition, initially, MRO services provided to foreign vessels were not treated as “service exports” although they were remunerated in convertible currencies. In June 2021, place of supply regulations were to allow zero-rating of these MRO services.
In the future, some issues will have to be addressed in this sector.
For example, the import of ships or ships into India is exempt from customs duties. However, from July 2017, an IGST of 5% has been levied on the import of vessels or vessels into India – which is quite significant considering the value of the vessel. The shipping industry is a high-volume, low-margin business. Thus, this IGST of 5% leads to a huge accumulation of input tax credits, which significantly affects the competitiveness of domestic shipping companies, i.e. Indian flagships vis-à-vis their counterparts strangers. Thus, the government should review the policy and assess options such as extending the IGST exemption on the import of vessels or vessels into India, like the old tax regime.
From a classification point of view, greater clarity on the category of multimodal transport is needed. For the exemption related to ocean freight with input credit, a possible solution to avoid the accumulation of credits could be to zero-rate this outbound ocean freight, thus allowing a refund of the input tax credit.
Furthermore, 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 for ensure coordinated and accelerated growth of the Indian maritime sector in this decade. The VIM 2030 was prepared after extensive consultations with public and private sector stakeholders. The same identifies over 150 initiatives in the maritime sector, including the policy and regulatory measures needed to support these initiatives.
Overall, over the past five years, some key issues have been addressed by the GST Board. This is a process of continuous evolution, and we are confident that regulations and processes will continue to be streamlined over time.
(Divyesh Lapsiwala, Tax Partner, EY India and Uma Iyer, Tax Partner, EY India. With contributions from Shreerang Yadav and Chandni Vora)