India extends 4.5% service tax on freight for CFR import cargoes


India will impose a total of 4.5% service tax over freight on cargoes imported on a delivered or CFR basis from January 22, shipping market participants said.

This service tax was already being levied since June last year on cargoes that were imported on a FOB basis and ships chartered by importers domiciled in India.

The move is significant because it will make cargoes of commodities such as oil and coal costlier since shipowners will pass on the service tax to Indian importers, shipbrokers said.

“The implementation of changes in India’s local service tax clause implies that there will be additional burdens on importers of cargoes,” one broker in Singapore said.

Any cargo imported into India such as crude, refined petroleum products, coal, coke, phosphoric acid, gypsum and limestone among others, will become costlier.

The total tax on imported goods will include the 4.2% service tax along with the Swachh Bharat (Clean India) Cess and Krishi Kalyan (Farm Welfare) Cess at 0.15% each.

When the service tax was first introduced on freight for imported goods in June 2016, most experts were of the opinion that the service tax was not payable if the owner and the charterer of the ship were not residents of India.

Since June last year, when the contract of supply was on a FOB basis and the vessel was chartered by the Indian importer, the service tax on the freight was paid by the Indian importer, the tanker broker said.

On January 12, the Indian government made a fresh attempt to bring the freight component of CFR or delivered contracts — where the foreign supplier chartered the vessel – into the service tax net.

The new notification removes the exemption given to non-resident service providers of freight.

According to the notification, the person responsible for the service tax will be the person who complies with the Indian Customs Act, which in this case is the agent of the foreign ship operator, a dirty oil tankers broker in Singapore said.

Now even CFR contracts, where both charterer and ship operator of the cargo imported are located outside India, are covered under this service tax of 4.5%, the tanker broker said.

When the contract of supply was on a CFR basis, where the foreign supplier of cargo was chartering the vessel and residing in a non-taxable territory, this service tax was not levied. “This tax exemption is now removed for all practical purposes,” the tanker broker said.

“Earlier the government did not know what to do about service tax on the freight for CFR sales where the foreign buyer chartered a foreign operator’s vessel and the matter remained in limbo till the new notification was issued last week,” the tanker broker added.

Meanwhile, sources said the new notification has created confusion among charterers and shipowners.

The standard charter party agreement notes that “all taxes on cargo voyage freights are to be for the charterer’s account except income tax and taxes on time charter hire levied in the country of vessel and/or her owner’s domicile. All dues, duties, charges and/or taxes on crew and/or stores are to be for the owner’s account.”

However, there are instances where charterers negotiate the freight tax to be included into the owner’s account, which the owner would factor into the freight cost.

“This is OK to be implemented with some [notice] included, But this [the move by the Indian government] is too quick for owners to factor into their costs,” a dry bulk shipowner operating Supramax vessels said.

Source: Platts 

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