No GST on Ocean freight under RCM in CIF contract – Part I

Goods and Services Tax (GST) has brought about a lot of changes in the way businesses operate in India. It is a value-added tax that is levied on the supply of goods and services in India. The tax is levied at every stage of the supply chain, from the manufacturer to the consumer.

Under GST, the tax is levied on goods and services at the point of consumption, rather than at the point of origin. This means that the tax is paid by the final consumer of the goods or services, rather than the supplier or the manufacturer.

However, there are certain exceptions to this rule. One such exception is the Reverse Charge Mechanism (RCM). Under RCM, the tax is paid by the recipient of the goods or services, rather than the supplier or the manufacturer.

In this article, we will take a look at the exemption of GST on Ocean Freight under RCM in CIF contracts. We will discuss what CIF contracts are, how the Reverse Charge Mechanism works, and what the implications of this exemption are.

What is a CIF contract?

A CIF contract is a type of contract that is used in international trade. CIF stands for Cost, Insurance, and Freight. Under a CIF contract, the seller is responsible for arranging for the shipment of the goods to the buyer's port of destination. The seller is also responsible for providing insurance for the goods during transit. The cost of the goods and the freight charges are included in the sale price.

What is the Reverse Charge Mechanism?

The Reverse Charge Mechanism is a provision under GST that shifts the responsibility of paying tax from the supplier to the recipient of the goods or services. Under RCM, the recipient of the goods or services is required to pay the tax to the government, instead of the supplier or the manufacturer.

This mechanism is applicable in cases where the supplier is not registered under GST, or where the supplier is registered, but the value of the goods or services supplied exceeds a certain threshold.

Exemption of GST on Ocean Freight under RCM in CIF contracts

In the case of CIF contracts, the seller is responsible for arranging for the shipment of the goods to the buyer's port of destination. The seller is also responsible for providing insurance for the goods during transit. However, the GST on the ocean freight is exempted under RCM for the buyer.

This exemption was introduced in the Union Budget 2018-19, with the aim of promoting ease of doing business and reducing the compliance burden for small and medium-sized businesses. The exemption is applicable only in cases where the buyer is a registered person under GST, and where the CIF value of the goods is up to INR 50,000.

It is important to note that this exemption is applicable only on the ocean freight, and not on any other charges, such as port charges or terminal handling charges. The GST on these charges will still be levied under RCM.

Implications of the exemption

The exemption of GST on ocean freight under RCM in CIF contracts has several implications for small and medium-sized businesses. Firstly, it reduces the compliance burden for the buyer, as they do not have to pay tax on the ocean freight separately. This simplifies the process of importing goods, and reduces the cost of compliance.

Secondly, it reduces the cash flow impact for the buyer. Since the tax on the ocean freight is exempted under RCM, the buyer does not have to pay the tax upfront, and can instead pay it at a later date. This improves the cash flow of the business, and allows it to allocate its resources more effectively.

Finally, the exemption of GST on ocean freight under RCM in CIF contracts promotes ease of doing business in India. It makes it easier for small and medium-sized businesses to import goods, and reduces the cost of compliance. This, in turn, promotes economic growth and development in the country.

Conclusion

The exemption of GST on ocean freight under RCM in CIF contracts is a welcome change for small and medium-sized businesses in India. It simplifies the process of importing goods, reduces the cost of compliance, and improves the cash flow of the business. However, it is important to note that this exemption is applicable only on the ocean freight, and not on any other charges. Businesses must ensure that they comply with all the relevant GST regulations to avoid any penalties or legal issues.