GST exemption on airfreight at 18% and ocean freight at 5% has lapsed from 30 September 2022. As a result, exporters facing decline in demand from USA and Europe and high freight rates are agitated and demand further exemption. Tax levy will increase cash flow and impact logistics efficiency and Ease of Doing Business, say experts.
Ritika Arora Bhola
GST exemption on air and ocean export freight granted by Central Board of Excise and Customs (CBIC) until 30 September 2022 has lapsed. The decision to end GST exemption on airfreight and ocean freight has left EXIM trade in despair. It may be recalled in 2018, CBIC released a notification to provide GST exemption for goods transportation charges by aircraft and vessels from India to any place outside the country. GST is a value-added tax on goods and services, implemented in July 2017 to eliminate the cascading effect of multiple taxes on the supply chains.From 1 October onwards, ocean freight attracts 5 per cent GST, while airfreight attracts 18 per cent GST.
The country’s airfreight and ocean freight forwarders are now finding themselves in a cash flow squeeze amidst growth challenges and ongoing international tensions such as Russia-Ukraine war, China lockdowns among others, which may lead to global recession. The forwarding community will now be required to pay taxes on shipments handled on a monthly filing basis and failing to do so will trigger hefty penalties. According to industry sources, “Compliance could prove to be a major financial burden on freight intermediaries, as most contracts are built around extended credit arrangements, especially regular or high-volume cases.” They warn this will have a huge impact on airlines, shipping lines and freight forwarders and the industry. As Indian exporters, who are already struggling with steep freight rates are yet to get back to the pre-COVID levels and a slowdown in demand from the USA and Europe. They fear their margins will be further squeezed by withdrawal of GST exemption on ocean and airfreight. The looming threat of recession in the western countries has already impacted India’s exports, which declined in September after remaining flat in August 2022.
As per official data, exports have shrunk by 3.52 per cent in September 2022 to US$ 32.62 billion from a year ago. The fall is steep—9.78 per cent—when non-petroleum and non-gems and jewellery exports for the month are considered. The reason attributed for the decline is the slowdown in demand in some developed economies and measures taken to contain domestic inflation and domestic food security concerns. The forwarders can claim the reimbursement later; it takes 4-5 months. MNCs and freight forwarders can survive, but experts feel it will affect medium and small-scale exporters severely. The team spoke to officials and industry stakeholders to have clarity on the ongoing debate.
M Afzal Malbarwala, President, Air Cargo Agents Association of India (ACAAI)
When GST was introduced in July 2017, air freight and ocean freight exports were taxed. However, after various rounds of representations, the GST Council saw the wisdom in the request for exemption and issued exemptions in respect of services by way of transportation of goods by an aircraft from customs station of clearance in the country to a place outside India and transportation of goods by a vessel from customs station of clearance in the country to a place outside India.
This exemption has been extended from time to time and, unfortunately, it expired on 30 September 2022, and has not been extended further. This impacted freight forwarders and exporters severely, who are facing challenges such as increased freight cost, and impending recession.
Internationally, there is no GST levy on export airfreight and ocean freight. International transportation, including local transportation and handling services, ancillary to international transportation is zero-rated in Singapore. Similarly in Australia, international transport of goods, including arranging of such services is GST free from the place of export in Australia to a destination outside Australia.
It is likely to have consequences on account of cash flow pressure for freight forwarders and exporters. India is going through a tough period. There are reports of recession abroad, which will affect our exports and energy crisis in other nations that may stop production, hit demand of Indian goods, and high international freight rates due to the oil pricing.
When internationally, most countries have zero-interest rate on air and ocean freight, India chose the exemption route. While zero-rating would have been ideal, the exemption served the purpose since GST on air freight or sea freight is a direct tax on exports. The ‘Make in India’ initiative would be affected since none of India’s neighbours levy GST on international freight. Levy of GST on export and ocean freight would make Indian products costlier and refund mechanisms in the hands of the exporters would not be an incentive given the fact that levy of tax operates as a disincentive on an export transaction.
The non-availability of exemption would result in freight forwarding of goods moving abroad, which can have an impact on India’s growth story. Therefore, our association and others, including export bodies, are making representations to the GST Council and the government to restore the exemption.
Shankar Shinde, Chairman, FFFAI
If the exemption is not extended for next period, the trade will have to bear a severe blow, which will increase the logistics cost manifold. The brief effects of the government’s move will be as below:
- Export air freight: Services by air from customs station of clearance in India to a place outside India—the tax rate shall be 18 per cent.
- Export ocean freight: Services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside the country—the tax rate shall be 5 per cent.
- Input tax charged on goods (other than on ships, vessels, bulk carriers, and tankers) used to supply a service (condition is the same as for import freight services).
After application of GST, majority of import consignments were booked on CIF basis from abroad and Indian freight companies, who used to contract freight on behalf of customers in India are already at the disadvantage since freight is not taxable abroad. The same is the case for export with levy ability of 5 per cent GST on ocean freight and 18 per cent GST on air freight on export consignments, the Incoterms are likely to change from CIF to FOB. The freight, booked from India by a freight forwarder, will be taxable and such export freight booking will be converted into Incoterms FOB where freight will be arranged to be paid in foreign country where there is no tax on freight. MNC/foreign forwarding companies will stand at an advantage against Indian companies due to levy ability of GST when booked/arranged from India and exporters and importers will prefer to get the freight paid in foreign territory than losing local logistics business to foreign firms. The above will shift the local business opportunities, in the freight forwarding sector, to the foreign country thus, defeating the government’s Atmanirbhar Bharat initiative.
Xerxes Master, President, Association Of Multimodal Transport Operators of India, AMTOI
The exporters who are already struggling with inflated ocean and air freight triggered by the pandemic, will now have to provide for additional working capital on account of GST, which has to be deposited with the government. The cost of money in India is between 8-12 per cent, whereas in the most developed world, which imports from India it is between 1-5 per cent. This additional capital is likely to be blocked anywhere between 60-90 days. Logistics cost for export freight will go up anywhere between 1-2 per cent.
The exporters are likely to avoid this undue cost, by changing the INCOterms from CIF to FOB, leaving the freight decision to the overseas buyer. This move will most certainly eliminate the freight forwarding community majority of who are small entrepreneurs belonging to MSME segment. In absence of these forwarders, there will be no competition in the market, and larger players, particularly multinationals are likely to exploit this lack of competition, resulting in a higher cost to the Indian exporter.
Resultant to the above-mentioned points, with the business moving out of the country, the profits earned on the freight, which besides generating employment, also added to the country’s revenue through Income Tax. This will now move overseas and this levy, the government claims to be revenue neutral that in our opinion is revenue negative. This would mean that it will increase the outward flow of foreign exchange impacting the ever-strained foreign exchange reserves of the country.
Coming to the method of implementation of the levy, while the Union government may believe that the trade should have been ready considering that the exemption was not perpetual and was with a sunset clause, we would like to state that to the best of our knowledge no country in the world applies taxes on export freight, let alone a country aspiring to increase its share in global export and better it’s ranking in ease of doing business (EoDB). This levy was not anticipated by the trade. The least that the government could have done to better compliance was to alert the trade in advance that the exemption would not be extended further, giving them ample time to study its impact, and therefore any changes would bring chaos.
To cite an example, the export freight is to be charged under IGST even in intrastate billing that required the business to make changes in their ERP, which is designed to work on the standard GST fundamental of interstate and intrastate split. In a nutshell, we at AMTOI categorically disapprove this move to levy GST on export freight and will make the required representation to the government against it. We are hopeful that wisdom will prevail and the government, which we believe is respective to the voice of the trade, will reconsider this decision and exempt this levy which hurts the EXIM trade.
Dr. A Sakthivel, President, Federation of Indian Export Organizations (FIEO)
The payment of GST on high freight rates will affect the liquidity of exporters to a large extent, particularly as the interest rates have increased with the recent hike by the Reserve Bank of India (RBI). The payment of GST on export freight, and particularly through ITC mechanism comes with a time lag of 2-3 months or so, though refund through IGST mechanism is faster. Such a move will affect agricultural exports the most. In many cases, in export of fruits and vegetables, the air freight, at times, is much costlier than the FOB value of exports. Therefore, the exporters would be required to pay a high GST amount on such freight thus impacting the cash flow. The exemption should have been extended to free the exporters from the hassle of securing additional funding. This may augment the liquidity of the government, but at the cost of the exporters. Since the cost of credit flow for the exporters is high, an exemption will help the export sector to have better liquidity, which is the need of the hour.
Yashpal Sharma, President, Air Cargo Forum India and MD, Skyways Group
We have been urging the Union government to make the GST exemption notification perpetual. While the net impact of the industry is not much, the process is quite painful for the industry stakeholders. If this is the case, then the industry stakeholders should have been informed before. The government should have taken everybody into confidence so that there is enough for all to prepare for the move. Suddenly, this (the withdrawal of exemption) came as a shock to everyone. It may be mentioned here that there is no point in first charging it and then getting it refunded. I feel it is uncalled for if we talk about EoDB. We should eliminate anything, which does not bring added value or additional revenue to the industry.
Vipin Vohra, Chairman, Continental Carriers Pvt Ltd
To support the NLP, the industry expected the government to extend the GST freight exemption notification. However, this has not happened. We think that this will have a significant financial blow on the freight industry. This move will increase the freight cost and create burden on the exporter. It is unclear how this action can push the goal of the Union Commerce and Industry Ministry, which introduced NLP with the single aim of reducing logistics costs and wants every district to encourage exports. Also, our industry is struggling to make a comeback post-pandemic and unnatural crises such as Russia-Ukraine war. Logistics companies have no choice but to pay 18 per cent GST on air freight and 5 per cent on ocean freight from 1 October 2022. I wish there was no GST on export freight and freight forwarding in India, as it is in most countries.
Cyrus Katgara, Partner, Jeena and Company
It is not the best in India, especially since it is not international. There is no GST or VAT taxes on air or ocean freight and India needs to be in the limelight and go with the international flow. This will definitely increase the logistics cost. It will also include the cost on working capital and bank. About 18 per cent GST on air cargo exports will create international disturbances, especially when there are no taxes to be levied on international freight. Indian exporters are also at a severe disadvantage when competing with other countries. India’s ranking will go down in ease of doing business. The country must be the part of mainstream international business as the Indian economy integrates globally. As far as international rules are concerned, we must go with the international flow.
J Krishnan, Board of Advisors, ACAAI
With effect from 1 October 2022, there is an additional upfront of 18 per cent of Goods and Services Tax (GST) payable on export freight with the facility for input credit after the GST exemtion lapsed on 30 September. Meanwhile, the Union Ministry of Commerce and Industry wants every district in the country to identify and promote exports of at least one product. For the GST registered, this increase and compliance cost as full input credit is permitted, which shall not fetch any additional revenue to the Union government. But, at the same time, increase the compliance cost to tax assesses. Internationally, all export-related charges are zero-rated except in this country, while the increase in logistics cost, increases the cost further.
Sunil Arora, Board of Advisors, ACAAI
Export freight was exempted through a notification since 2017. The Union Ministry of Finance dwelled upon logical reasons and gave continuous extension till September 2022. The levy of Gods and Sales Tax (GST) on export freight will be a big deterrent for Indian international economic scenario. Initiatives such as PM GatiShakti Master Plan, Make in India and ease of doing business will be taking a reverse step. GST on export freight will make our export commodities anti-competitive in the world market. India has survived the pandemic setback and instead of supporting the industry’s cash flow issues, exporters and freight forwarding fraternity will suffer cash flow setback and other repercussions attached with refund mechanism. Firstly, subjecting freight to GST and then acknowledging refunds is not a wise workable financial module. In fact, it will add more complications and lengthier accounting and financial management. We seek permanent zero-rating on international freight thus giving us a level playing field in the international trade. None of our major competitor nations have GST or VAT on export air and ocean freight.
Jaideep Raha, MD, Jetex Ocean Air Pvt Ltd
Tax on air freight and ocean freight is very disappointing. There should be permanent GST exemption in order to make the exports economical. The Government of India must understand India is not Germany, Japan, or South Korea. We still export low value products and perishables items. The 18 per cent on air freight and 5 per cent on ocean freight will be an impediment to the exporters and will greatly upset the balance of trade. Since the US Dollar and the Euro are at an all-time high, they are also restricting our imports.
Deepak Tiwari, COO, KSH Logistics
The cancellation of GST exemption will challenge the industry financially. This will put pressure on the working capital and cash flow of traders, which they are already struggling from since the pandemic outbreak. Overseas freight has gone up by 300-350 per cent from pre-COVID levels and freight rates are up by 250 per cent as compared to 2019. The going will be difficult for exporters. In addition, the compliance cost will also increase.
Siddharth Jairaj, CEO- India, TVS SCS Global Freight Solutions
I feel GST on the export freight needs to be avoided if exports are to be encouraged. Adding GST will increase the cost of operations and cash flow. The Government of India’s objective is to ensure growth of exports. To promote exports and ease of doing business, it should be avoided. The move will have a multi-pronged affect from affecting cash flows of freight forwarders to increasing the freight cost for the exporters and increasing the cash flow pressures to an accumulation of input tax credit.
Pratul Shekhar, Senior Director, Airfreight (Indian Subcontinent), DSV
The freight forwarding sector is urging the Union government to extend the Goods and Sales Tax (GST) exemption notification. For exemption, the government argues that one can take input credits and they are making refund process easier but, when the freight prices are at a high (when the GST was implemented) lot of forwarders and large companies will be facing cash flow issues. The companies that are cash rich and probably will be able to manage their cash flows better, but others will not. It will be a tough call, but in the longer run, we all need to accept this provided the processes of refund is faster as compared to the existing one.
Parvinder Singh, MD, Hans Informatic
GST is 18 per cent on airfreight and for ocean freight it is 5 per cent. Now per kilo, the rate of ocean freight is much less than the airfreight. So, there is less tax burden. For ocean freight forwarders’, it will be miniscule, but for air cargo sector it is huge. The forwarders can take reimbursements, but it will be reimbursed in 3-4 months. So, the working capital will be blocked, and they cannot claim the taxes back from the government. With high airfreight rates and working capital under pressure, the deployment of capital will be a big challenge. Only big forwarding firms will be able to handle it and survive.
Satish Lakkaraju, Global Head Air Freight and Pharma, WIZ
The levy of GST from 1 October onwards came as a big surprise for the airfreight industry stakeholders.GST is not uniform for both air and ocean freight. For ocean freight it is 5 per cent, whereas for air freight it is 18 per cent, which puts the industry in a difficult position, considering high air freight rates and low commodity rates, exporters will have to put in more amount of cash to run their operations. Similarly, the credit period, which the forwarders extend to customs, will put the burden on the small and medium-scale industries. The geopolitical crisis such as the ongoing Russia-Ukraine war, lockdowns in China etc are putting a lot of pressure and indicates global recession in the coming months.
‘GST gives credibility to integrity of businesses’
Associations must create Blockchain platform to address GST documentation and involve customs, banks, insurance. With NLP in place, States must promote associations to build similar platforms and integrate state systems aligned to EXIM chain, says N. Sivasailam, ex-Special Secretary (Logistics), Dept of Commerce and Industry, GoI.
It is a well known principle of international trade and a matter of common knowledge that taxes cannot be exported. Also, the issue of GST exemption is different from zero rating of GST. We had an exemption regime for EXIM, which lasted until 9 September 2022. Now, the Centre has not extended the GST exemption regime for the EXIM trade. It appears that the government has an appreciation of data over the years that the actual amount of exemption claims for exports is disproportionate to the value of the exports of goods and services.
It appears to me that instead of pursuing a regulatory route of issuing notices and engaging in enquiries to recover the unpaid taxes, which is not ruled out, and consequences of vitiating the overall business atmosphere and affecting the fair business climate and image of India, the government has, as a first step, done away with the GST exemption regime to reform the terms of trade. The immediate consequence is GST must be paid and returns have to be filed by the suppliers to enable buyers to claim input tax credit or the exporter to claim refund of GST with proof of export.
The issue of free riders and moral hazards inherent in the grant of exemption without systemic checks and balances to prevent ineligible persons from availing the exemption, and coercive action being the only remedy to plug the loopholes with consequences of protracted litigation and vitiating of the overall business climate, has prompted the government to do away with the exemption and compel a system for claim of benefits through a more transparent IT supported reporting and claims system supported by verifiable documents and data.
The withdrawal of the exemption in a short run puts the trade intermediaries at a disadvantage, introduces regulatory compliance requirements which were hitherto absent and also puts them at some business and financial risk. The disadvantage in terms of greater demand on their cash flows will include GST payments as well. The compliance requirements is in terms of filing returns, which hitherto was exempt with its attendant implications on cost of running the office, maintenance of records and follow up with the regulatory authorities that is not altogether eliminated even with considerable automation. The business and financial risk arises out of moral hazard with the suppliers to the business unit in question not filing returns/delay filing returns affecting the input tax credit/refund claims of the business unit and likewise also not paying the GST receipts on time and not filing returns on time affecting integrity/credibility of the business unit for its customers. The requirement of all business units in the chain to pay the GST collected and file returns ensures that only the exports that are actually made are liable for refund of GST in the hands of the exporter.
Therefore, in my view, the exemptions encouraged and contributed to the dilution of the integrity of business practices, if the data on exports not being proportionate to the GST exemptions claimed is any yardstick albeit a broad but definite indicator, besides apparent leakages of legitimate revenues to the government. Of course, issues of moral hazards remain at the level of the businesses.
These can be tackled by ensuring that suppliers are star-rated preferably by the IT authorities generally, if not already done, or by the industry associations about payment of the GST and filing returns. The best way in my view to organise it is for the industry association to create a Blockchain tech-enabled platform that can address the documentation requirements and its validity can contribute to real-time GST refunds as well, immediately on issue of LET export order by customs. The platform can also increase its scope and reach to involve other business entities such as customs and banks among others.
It is only with a robust compliance reporting system and robust and transparent business practices of individual businesses regarding tax compliance and reporting that the country can move to a regime of zero-rating of exports since the country cannot afford to lose time in litigation and attendant vitiating of business climate. In my considered view, a robust Blockchain system by industry associations to start with and star-rating of suppliers to the industry as regards compliance with GST payments to treasury and filing of returns can contribute significantly to improving the ease of doing credible business since credibility is the issue at stake here. A refrain is that the removal of exemption affects ease of doing business. The factoring of tax compliance reporting systems cannot be said to affect ease of doing business when there is no credible mechanism except coercive regulation to address deviants.
Therefore, a transparent reporting mechanism that the GST system mandates, improves the ease of doing business since there is complete regulatory certainty for businesses. Yes, in a short run, the cash flow requirements will increase but these can be factored in working capital requirements and better reporting all around that reduces the moral hazard problem serves to improve business climate by facilitating new financing options such as Bill discounting on a larger scale and factoring without recourse.
Going forward with robust Blockchain systems in which the businesses in the Export chain integrate vertically, the stage will be set for zero rating of exports because traceability will cease to an issue and regulatory oversight is greatly simplified. In line with the National Logistics Policy, it is for the State to encourage business associations build the Blockchain platforms and facilitate the integration of state systems such as that of Customs, Railways, banks, other suppliers / service provider businesses or their platforms that are vertically aligned in the EXIM chain. The technology tools are there. There is capability to build them cost effectively, maintain them frugally and upgrade them diligently. Businesses need it but can’t individually or in small groups create it to make business sense. Only business associations at the minimum have the bandwidth. The State can be supportive in integrating its platforms but cannot build them since business practices are varied. The question is, are the business associations in the logistics eco-system and apex associations of Trade such as FIEO among others, having the will to create the block chain platforms for their members?
There is a case for a public Blockchain platforms that can be leveraged by the institutions. The building of Blockchain platforms is strategically important too, so that developments in the trade globally do not force us to be hooked onto platforms abroad for transacting trade-related business. There is thus a need for a policy eco-system to create these Blockchain platforms quickly. Do we see an opportunity for yet another Aadhaar, UPI moment here that is transformative of the business ecosystems?
