Acting on the Supreme Court ruling in the Mohit Mineral case, the Finance Ministry has exempted ocean freight from Integrated Goods & Services Tax (IGST). Such a move is expected to unblock working capital of importers.

IGST is levied on all inter-State supplies of goods and/or services.

It is applicable on any supply of goods and/or services on both imports and exports. On May 19 last year, the Supreme Court, in the matter of Mohit Minerals Private Ltd-vs-Union of India, quashed the IGST levy on ocean freight under RCM (reverse charge mechanism).

The judgment held that the recommendations of the GST Council are not binding on the government.

Notifications have now been accordingly issued amending relevant GST rate/exemption/ reverse charge entries to enforce the principles laid down in the judgment.

As on date, services provided or agreed to be provided by a person located in non-taxable territory to a person located in a similar territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is taxable at 5 per cent.

However, with the notification, which will take effect from October 1, 2023, the tax is not applicable.

Commenting on the latest notification, Rajat Mohan, Senior Partner of AMRG, said: “This will positively impact importers of capital goods whereby extra working capital blocked will be released. This will also help importers of raw materials in exempt sectors by lowering their costs, example alcohol, petroleum products, real estate developers.”

In the matter of Mohit Minerals, disposing an appeal by the Centre, the Supreme Court agreed with Gujarat High Court to the extent that a tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.

The top court concluded that the government, while exercising its rule-making powers under the provisions of the CGST Act and the IGST Act, is bound by the recommendations of the GST Council.

However, that does not mean that all the recommendations of the GST Council apply on the legislature’s power to enact primary legislations. The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes.

The specification of the recipient – in this case, the importer – by a notification is only clarificatory, it said.

It also said that the levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’.

Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of the GST law, the court had said.