In a much-needed respite back in 2018, the Central Board of Indirect Taxes and Customs (CBIC) released a notification to exempt the following from application of Goods and Services Tax (GST):
- Service by way of transportation of goods by aircraft from India to a place outside India.
- Service by way of transportation of goods by a vessel from India to a place outside India.
The exemption was valid until 30th September 2018, but was further extended till 30th September 2022.
Subsequently, with no further extension i.e. starting 1st October 2022, the following transactions would be taxable under GST –
- Ocean export freight billed to customers in India to be charged at the GST rate of 5%.
- Air export freight billed to customers in India to be charged at the GST rate of 18%
Also, based on the provisions of Section 12(8) of the IGST Act, since there have been no further extensions in exemption from GST application, then the tax shall be charged on all outbound freight transactions when billed to Indian customers considering the place of supply as 97 (i.e. Other Territory) w.e.f. 1st October 2022.
With effect from today, there will be an additional upfront 18% GST payable on export freight. The EXIM fraternity has been expectant of an extension of the exemption, however, the news has sent the industry into a frenzy. With the exemption not in place, there will be added pressure on the working capital and cash flow of traders, which already have been in a tightrope situation since the pandemic struck. It has been further going south due to a lack of robust international demand on traditional export products.
“While Commerce Ministry wants every district to identify and promote export of at least one product, the withdrawal of this exemption will pose financial challenges – especially to the SME segment as many of them are cottage industry based or below the threshold limits. Even for the GST registered, this increases their compliance cost as full input credit is permitted which shall not fetch any additional revenues to the Government but would increase the compliance cost to the taxpayers,” said Mr J Krishnan, Former President and member of Board of Advisors, ACAAI.
The cash flow will be the biggest hurdle. “Every exporter has to have huge investments after the pandemic since all importers are asking for credit and to keep up business and to compete with other countries our exporters have to do. On top of it if this rule will seriously affect exports. Anywhere in the world, there is no GST on exports and related. For sea freight, which is not even 1/3rd the cost of airfreight, there is no GST. Then why for air? For air import (there is) no GST but for sea import 5% GST. We request the government to seriously re-consider the decision and charge GST @ 0% which happens worldwide for sea and air freight,” added Afzal Malbarwala, President, ACAAI.
By majority opinion, the move is going to have a negative impact on exporters, cash flow being the biggest hurdle. The news comes shortly after the launch of the National Logistics Policy which turned out to be a crowd-puller for the industry and being helmed as a move to increase export activity.