GST on Ocean freight for import of goods unconstitutional: Supreme Court

The supreme court’s recent ruling that declared the GST paid on ocean freight for import of goods as unconstitutional is set to change the way the GST framework operates in the country.

Indian importers who have paid such tax in the past are eligible for a refund. Further, importers who have not paid such tax on the import of services will not be required to pay it because of the new Supreme Court ruling.

The court further held that recommendations by the GST council are not binding either on the state or the union and it has persuasive value.

“This judgment shall change the landscape of those provisions under GST which are subject to judicial review. As the court has gone ahead to categorically hold that the GST council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST council recommendations,” said Abhishek A Rastogi, Partner, Khaitan & Co., who argued for the petitioners before the High Court, Supreme Court and several other courts.

The supreme court ruled that both the parliament and state legislatures possess equal powers to legislate on GST. In most import cases, the ocean freight is paid by the seller (company) who is not based in India.

If a European company is exporting goods to India, then the company agrees with the shipping lines and pays ocean freight. In such a case, the tax department cannot charge GST to the European company, hence the tax department collects IGST from the Indian importer through a “Reverse Charge Mechanism.”

The government had approached the Supreme Court against an earlier Gujarat High Court judgment that said that IGST (integrated GST) on ocean freight is unconstitutional.

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