India: Shipowners May Be Liable to Pay Service Tax *Update*

Update: 1 February 2018

We refer to our previous Industry News article dated 20 January 2017 relating to service tax in India.

North has been assisting a number of Members in relation to the imposition of service tax in India, which commenced for the importation of goods into India where the bills of lading were dated 22 January 2017 onwards. The Indian tax authority has since limited the period of imposition – via Indian ship’s agents – on non-domestic registered and disponent owners, to bills of lading dated between 22 January 2017 and 23 April 2017.

The reverse charging scheme had made non-domestic registered and disponent owners liable to pay service tax based on freight, hire or commercial value of the goods imported at a rate of 15% (rather than the 4.5% base rate applied to Indian carriers by way of CENVAT tax relief available to Indian tax residents).

Writs seeking to challenge the imposition of the service tax were filed in the High Courts of Chennai, Delhi, Bombay, Goa bench of the Bombay High Court, Hyderabad, Gujarat, Karnataka and Kerala. The Kerala High Court recently ruled that the Indian tax authority does not have a lawful basis to charge foreign carriers at the higher 15% rate, thereby striking down the relevant parts of the applicable tax circular (Circular No. 206/4/2017).

The judgment provides welcome clarification that the rate of service tax to be paid by ship’s agents (for and on behalf of foreign carriers) ought to be at the lower rate of 4.5% for the period from 22 January 2017 to 23 April 2017. However, the judgment is open to appeal to the Divisional Bench in the State of Kerala and, thereafter, to the Indian Supreme Court (as yet, we are not aware that any appeal has been filed). In addition, the judgment is only applicable to the State of Kerala and, therefore, will only have persuasive value in other Indian court jurisdictions.

Should Members have any questions or concerns regarding the above, please contact North’s FD&D Department for further advice.

With special thanks to Bose & Mitra & Co., who contributed the above information to North’s FD&D Department.

20 January 2017

The Indian Government’s withdrawal of service tax exemptions for the transport of goods by a vessel from a place outside India up to the customs station of clearance in India can be summarised as follows:

When do the changes come into effect?

India is to impose service tax on all import freight/hire with effect from 22 January 2017.

What is the rate of tax?

The service tax will now be payable at 4.5% of gross earnings on import freight/hire into India, irrespective of where freight is collected.

Who is liable?

Any person/entity that pays, or is liable to pay import freight/hire (the “Freight remitter”).  

Even where the Freight Remitter is domiciled outside India, the provider of such a service shall be liable to pay service tax. In this case it may be a vessel’s owner or disponent owner.

How is it collected?

The service tax would normally be collected and paid to the tax authorities by:

(i)   If the Freight Remitter is located within India – the Freight Remitter.

(ii)  If the Freight Remitter is located outside India – the ship’s agent prior to the vessel’s

      departure.

The effect of this requirement may be that a vessel’s owners may need to provide agents with funds before the vessel arrives into the country, since the tax amount could be substantial and the agents may call for a copy of the Charter Party and a declaration by the owners as a supporting document. 

Should Members have any questions or concerns regarding the above, please contact North’s FD&D department for further advice.