Shipping industry needs more to maximise the opportunities created by GST
In a high-volume, low margin business like shipping, even a 5 percent cost disadvantage can dent the competiveness of domestic shipping businesses significantly.
At a time when the GST revenue collections have started showing signs of stability and the dust of the transitional hiccups have almost withered away, there are certain sectors which are still settling under the new tax regime. Shipping is one sector which has been impacted under this ‘One Tax, One Market’ era.
Shipping industry in India can be classified into two segments – Goods segment, which broadly covers shipbuilding and shipbreaking activities and the Services segment, which covers transportation of goods – both domestic (like coastal and inland waterways) and international, port services and ship repair. One of the significant impacts of the GST on shipping sector is the unblocking of embedded taxes on capital goods which used to remain unutilized against the central taxes paid on services in the pre-GST era.
GST has made this possible by unblocking this credit thereby reducing the cost of capital in the shipping industry which is also a highly capital intensive industry. This is also one reason for the reduction of the marginal effective tax rate in the services segment post-GST, especially in transportation services like shipping. The other advantage is the certainty of taxes on the industry as a whole. Tax rates both on goods or services now has to be decided by the GST Council. No state can tinker with the tax rates on their own as it can only be changed through a collective decision in the GST Council. This certainty in taxation will have a positive impact on both foreign and domestic investment interest in the sector.
Although the new tax regime has led to the above gains for the sector, there remain certain anomalies that need to be addressed so that the advantages of GST can be fully reaped by the sector. These include the differential tax treatment of Indian and foreign shipping businesses, GST on import cargo transportation services provided to overseas consignor, discrimination in taxability of outbound freight post September 2019, levy of IGST on import of vessels and no refund of input tax credit (ITC) for GST on outbound freight services provided to Indian customers.
One major area of concern for the domestic shipping companies is related to freight. In case of import cargo transportation services, if an overseas consigner appoints an Indian shipping company, GST is levied at 5 percent since the place of supply of services is destination of goods which is in India. On the other hand, if the overseas consignor appoints a foreign shipping line for providing the same service, GST is not applicable as the shipping company is not registered in India for GST.
In a high-volume, low margin business like shipping, even a 5 percent cost disadvantage can dent the competiveness of domestic shipping businesses significantly. On account of this inequity in tax treatment of Indian flagships vis-à-vis their foreign counterparts, many domestic shipping businesses are exploring options to operate their business through a foreign subsidiary to avoid this superfluous tax burden.
Further, there is also a difference in the taxability of outbound freight in the hands of Indian shipping companies vs. foreign shipping companies. If an Indian shipping company provides services of transportation of goods outside India by a vessel to an Indian exporter, then the place of supply of such transportation services shall be the location of Indian exporter and 5 percent GST is payable by the Indian shipping company. However, if a foreign shipping company provides the services of outbound freight to an Indian exporter, then the place of supply of such transportation services will be the place of destination of such goods, i.e., outside India and thus, GST will not be applicable.
To address the issue, the government provided an exemption to transportation of goods from India to outside India by air/sea vessel without the requirement of reversal of ITC. However, this exemption has a sunset clause restricting it up to 30, September 2019.
Another related issue is of non-availability of refund of ITC in respect of outbound freight services provided to Indian exporters. As such supply is an exempt supply and ITC is not required to be reversed, there is an accumulation of ITC and the same cannot be claimed as refund (as the said service does not qualify as export).
In order to address these anomalies, the plausible policy suggestion could be an amendment of the GST law to zero rate import and export cargo transportation services provided by Indian Shipping lines by treating these as export of services.
The other important area that requires attention of the policymakers is the issue of IGST levied on import of vessels. A 5 percent IGST is levied in case of acquisition of ships or vessels in India which is quite substantial considering the value of the ship. This results into considerable accumulation of input tax credit as it cannot be offset against the 5 percent duty payable on transportation services. Here, there is a case for the Government to relook at the policy and evaluate options like extending IGST exemption similar to the one available in the erstwhile tax regime on import of bulk vessels in India. This exemption could be restricted to specialized bulk vessels used in coastal shipping / inland waterways and not to other categories of defence related ships in which India is seeking to build a presence for legitimate security reasons.
The ship building industry in India is highly capital intensive and due to widespread automation and robotisation, the jobs generated per unit of investment in the ship building industry is not very significant. For a capital scarce country like India, many more jobs would be created in the coastal services sector rather than in building these ships in India. While phasing away of all countervailing duty exemptions can help promote ‘Make in India’ for shipbuilding industry, exceptions have to be made to this general principle where there is not much scope for domestic manufacturing.
In order to leverage the opportunities created by the GST to the maximum, it is important for the government to address these concerns of the domestic shipping companies through plausible policy options.
(VS Krishnan is National Leader, Tax and Economic Policy Group, EY India. Deepraj Pathak, Senior Tax Professional, EY India, also contributed to the article. Views expressed are his personal)