Introduction
Ocean freight is a method of transportation of goods via ships and is one of the popular ways to move cargo across the globe. More than 90% of international trade is conducted through sea lanes. Given India’s prominent role in its international exports and imports, it is crucial for businesses involved in international trade to understand how the Goods and Services Tax (GST) works and how it applies to ocean freight.
This guide explains everything about GST on ocean freight for you. We will explore both exports (when goods come out of India) and imports (when goods come into India), discuss varying kinds of freight terms, relevant government notifications, court decisions, and practical examples.
What is Ocean Freight, and Why Does GST Apply?
Ocean freight is the movement of goods on ships supported by shipping lines. Under the GST law in India, ocean freight is a service and is considered a taxable supply. This is based on the Central Goods and Services Tax (CGST) Act and the Integrated Goods and Services Tax (IGST) Act. Movement of goods by vessel is considered a service under Heading 9965.
Depending on how the service is supplied, GST is charged.
- At either 5% (without the ability to claim input tax credit) or
- At 18% (with the ability to claim credit for the GST paid).
Refer: Notification No. 11/2017-CGST (Rate), Entry 9(ii)
When deciding who will pay the tax, the law seeks to find out who is paying for the service. If it is the importer (or exporter) who is paying for the freight, they are considered to be the “recipient” of the service and may, therefore, be liable to pay the tax.
Important terms:
- CIF (Cost, Insurance, Freight) This means the seller (likely to be outside India) pays for freight and insurance. The buyer (the Indian importer) pays a single amount that is made up of the entire value of the service.
- FOB (Free on Board). This means that the buyer (the importer) pays for shipping and arranges it once the goods are loaded onto the boat.
So, in CIF, the seller is considered to be the one receiving the transport service, and in FOB, the buyer is considered to be the recipient.
Talk To Expert
GST on Ocean Freight of Export and Import
(4.8)
Legal Framework Governing GST on Ocean Freight
| Statute / Provision | Key Relevance |
| Section 2(93), CGST Act | Defines “recipient” of supply |
| Section 7, CGST Act | Governs the taxable supply of goods/services |
| Section 5(3), IGST Act | Lists services taxable under the Reverse Charge Mechanism (RCM) |
| Section 2(11), IGST Act | Defines “Import of Services” |
| Section 2(6), IGST Act | Defines “Export of Services” |
| Section 12(8), IGST Act | Place of supply for transportation to a registered/unregistered person |
| Section 13(9), IGST Act | (Now omitted) The place of supply for goods transport was the destination |
GST on Export Freight (Outbound Freight)
(Goods Going Out of India)
When Indian goods are exported via sea, GST rules apply based on who is providing and receiving the service. From January 25, 2018, the government gave a temporary GST exemption for export ocean freight through Notification No. 2/2018. It was valid until September 30, 2022. After that, the exemption ended, and export freight became taxable again.
From October 1, 2022, shipping lines or freight service providers must charge GST on export freight services. Exporters can choose to pay 5% GST without claiming input tax credit or pay 18% GST and claim input tax credit.
The address of the service recipient and the shipping line influence whether IGST (Integrated GST) or CGST + SGST (Central and State Goods and Services Tax) will apply.
For example:
- If both the shipping line and the exporter are in India, tax applies as Forward Charge (the tax paid by the shipping company).
- If the shipping line is located outside India and the Indian exporter paid for freight, the exporter could pay tax as a Reverse Charge (tax paid by the recipient).
- If the service provider is in India and the recipient is a foreign person, the transaction could be an export of services and taxed at 0% tax if export conditions are satisfied.
This legislative change caused some confusion as to the “place of supply” of such services. The previous law in Section 12(8) of the IGST Act specified that the destination of the goods was the place of supply. However, Section 13(2) of the Finance Act, 2023, has stated otherwise. The place of supply is the location where the service recipient is located unless the service is by mail or courier, which is deemed to be the location of the supplier.
There are some changes that may affect whether the required GST is IGST or CGST + SGST; however, these changes do not alter taxability.
Read more: GST Council: Structure, Members, Meetings and Functions
Export Freight Scenarios
| Shipping Line Location | Recipient Location | Place of Supply | Type of Tax | 25-Jan-2018 to 30-Sep-2022 | From 1-Oct-2022 |
| India (Gujarat) | India (AP) | Outside India | IGST | Exempt | Taxable (FCM) |
| India (AP) | India (AP) | Outside India | CGST+SGST / IGST | Exempt | Taxable (FCM) |
| Foreign Shipping Line | India (AP) | Outside India | IGST | Not applicable | Taxable under RCM |
| India (Gujarat) | Foreigner | Outside India | IGST | Exempt | Zero-rated supply |
| Foreign Shipping Line | Foreigner | Outside India | — | Not in the GST scope | Not in the GST scope |
Classification of Transactions
| Shipping Line Location | Recipient Location | Taxability Post Oct 2022 |
| India | India | Taxable (Forward Charge) |
| Foreign | India | Taxable (Reverse Charge) |
| India | Foreigner | Zero-rated supply (if export conditions met) |
| Foreign | Foreigner | Outside the GST scope |
GST on Import Ocean Freight (Inbound Freight)
(Goods Coming into India)
When goods are shipped to India by sea, the freight aspect will either be subject to GST or not, depending on the shipping terms, CIM (Cost, Insurance & Freight), and FOB (Free on Board).
CIF vs FOB: Who is Liable?
| Transaction Type | Who Pays Freight | Who is the Recipient | GST Liability |
| CIF | Foreign Exporter | Foreign Exporter | No GST on the importer |
| FOB | Indian Importer | Indian Importer | GST payable under RCM |
CIF Contracts
With shipping terms CIF, freight is arranged and paid for by the exporter. The Indian importer (recipient) is not the recipient of freight service, within the meaning of Section 2(93) of the CGST Act, and therefore, there is no shortage of liability on the importer to pay GST under the Reverse Charge Mechanism (RCM).
FOB Contracts
Under shipping terms FOB, the importer arranges and pays for freight and acts as the recipient of the freight service, thereby attracting GST either under RCM or Forward Charge, depending on who is the provider of the freight service.
Previous Provisions & Deemed Freight Value
Under Notification No. 8/2017 & 10/2017-IGST (Rate), an importer was required to pay IGST @5% on ocean freight for CIF, when the importer was not directly involved in providing the freight service.
A Corrigendum to Notification 8/2017 states that if the actual freight is unknown, then freight shall be deemed to be 10% CIF value, and this is the deemed value that was used to calculate GST under RCM.
The deemed freight valuation method led to double taxation because the freight was already covered under the customs assessable value, which was liable for IGST on import.
Mohit Minerals Pvt Ltd Case
The constitutionality of levying GST on CIF freight was challenged in the Mohit Minerals Pvt Ltd case. The important conclusions made by the Supreme Court’s ruling (May 19, 2022) include the following:
1. The importer under CIF contracts is not liable to pay GST under RCM.
2. Notifications 8/2017 and 10/2017 were ruled ultra vires. (No legal power)
3. The levy is unconstitutional, according to the Court, for the following reasons:
- Double Taxation – The freight has already been taxed at customs
- Lack of Legislative Backing – The delegated legislation (notifications) cannot supersede the IGST Act
- Extraterritorial Application – The supplier of the freight and the recipient of the freight are both outside India
This important ruling was a huge relief for Indian importers who deal with CIF contracts.
Import Freight Scenarios
| Shipping Line Location | Recipient Location | Place of Supply | Type of Tax |
| India (e.g., Gujarat) | India (e.g., AP) | Andhra Pradesh (Sec 12(8)) | IGST @ 5% / 18% (Forward Charge) |
| India (AP) | India (AP) | Andhra Pradesh (Sec 12(8)) | CGST + SGST (Forward Charge) |
| India | Foreign Party | Outside India (Sec 13(2)) | CGST + SGST / IGST / Zero-rated |
| Foreign Party | India (AP) | India (Sec 13(2)) | IGST @ 5% (RCM applicable in FOB) |
| Foreign Party | Foreign Party | Outside India | Outside the GST scope |
Current Position
Importers under CIF terms are not required to pay GST on ocean freight under RCM, per the ruling brought by the Supreme Court.
As the notifications have not yet been formally revoked, some but not all businesses are voluntarily paying GST as a precaution (especially when the input tax credit (ITC) is fully available and thus makes the financial impact minimal).
Conclusion
The GST rules for ocean freight have changed a lot, especially based on whether imports are done on a CIF (Cost, Insurance, and Freight) or FOB (Free on Board) basis. For CIF contracts, where the foreign supplier pays for the freight, the Indian importer is not considered the recipient according to Section 2(93) of the CGST Act. This means the importer will not have to pay GST under the Reverse Charge Mechanism (RCM) in this case.
In contrast, for FOB contracts where the importer pays for the freight, the importer is the recipient. Therefore, the importer must pay 5% IGST under RCM, as stated in Notification No. 10/2017 – IGST (Rate). Previously, there were issues with double taxation for shipper/freight on CIF due to deemed values. We have clarified this situation. Some importers may choose to pay GST voluntarily as a safe option to avoid disputes, allowing them to claim full input tax credit (ITC).
For exports, the GST exemption on ocean freight ended on 30 September 2022. Now, freight is taxed at either 5% or 18%, depending on the exported goods. Exporters can claim zero-rated treatment under Section 16 of the IGST Act if they meet the necessary conditions.
Logistics providers, such as customs and transport companies, can claim input tax credit for services related to their international contracts. Overall, businesses involved in international trade need to pay attention to their contracts (CIF vs. FOB), stay updated on regulations, ensure their documents are correct, and be careful of tax risks. This way, they can effectively manage their working capital and recover their expenses through ITC.
To get expert assistance in GST registration and GST-related matters, visit https://corpbiz.io/.
Frequently Asked Questions
What is ocean freight, and how is it viewed under GST law in India?
Ocean freight is the transportation of goods by sea routes, where goods are transported by ship (vessel). Under the GST law in India, ocean freight is a taxable service under Heading 9965. Depending on the conditions of the service, GST rates could be 5% (no input credit) or 18% (credit being available).
Why is GST applicable in ocean freight?
GST applies to ocean freight because the law does consider the supply of service based solely on CGST and IGST Acts regardless of whether the transaction is domestic or international as long as the service performs a taxable supply under the scope of Section 7 of the CGST Act where both the place of supply and recipient are considered.
What is the GST rate for exports and Imports?
GST rates on ocean freight service are applicable at 5% without input tax credit (ITC) or 18% with ITC for both exports and imports, depending on the nature of the transaction and the choice exercised by the shipping company.
For exports, GST was exempt before September 30, 2022, but is now taxable from October 1, 2022. GST on the import side, if under FOB terms, is 5% GST under the Reverse Charge Mechanism (RCM). With CIF contracts, no GST on freight is payable as determined by the Supreme Court. So, in summary, the GST rate is 5% or 18% for both scenarios.Is RCM applicable to sea freight?
Yes, RCM (Reverse Charge Mechanism) is applicable to sea freight in certain instances. This is the case when the import is associated with FOB terms and the freight charges have been made by the Indian importer to a foreign shipping line, or not in India, because the importer will be liable for the GST at 5% under RCM.
Conversely, if the import has CIF contract terms where the foreign supplier typically assumes all the freight expense, the court ruled GST cannot be applied under RCM since it is not a service received by the importer. This means RCM is applicable in a very limited way, more so under FOB terms.How is GST applicable and determined if both the exporter and shipping company are registered in India?
If both parties are registered in India, GST is payable, and Forward Charge by the shipping company. The relevant GST is based on the location of the recipient and supplier, either IGST or CGST + SGST, and this was always a helpful opportunity for exporters in terms of ITC planning.
What is the impact of Section 13(2) of the Finance Act, 2023, on GST for export freight?
Section 13(2) of the Finance Act, 2023, amended the GST place of supply provisions for transportation services. Now, the place of supply of a transportation service (for goods) is the location of the recipient if transport by mail or courier service is not involved. Although Section 13(2) changes the GST tax to be applied (CGST + SGST or IGST), it does not change whether or not tax is applicable.
How does the place of supply rule influence GST on ocean freight?
Place of supply rules will impose whichever GST (CGST + SGST or IGST) applies to the supply of the service. For example, Section 12(8) of the IGST Act refers to the destination for goods, which is relevant for CGST + SGST in Canada export freight via shipping and Section 13(2) for international (destination of goods) freight, which considers the recipient's location in Canada after the 2023, Finance Act amendment. The taxability rules determine the GST type that is required.
What supporting documents should be retained to support GST compliance concerning the ocean freight service?
Businesses should retain freight invoices, shipping bills, transport agreements, and records that support GST payments (for example, RCM or FF). Valid tax invoices and proof of receipt of goods/service is the critical document type for ITC claims to demonstrate GST eligibility with respect to eligibility and in the event of assessment scrutiny.
Are there still zero-rated benefits for ocean freight for exporters?
Yes. Exporters may be able to claim zero-rated benefits under Section 16 of the IGST Act for ocean freight as long as it is treated as an export of service. The service needs to meet the conditions of LUT / Bond filing or IGST refund claims, and the service must be used outside India.
What should importers and exporters be doing to keep themselves compliant with GST when it comes to ocean freight?
Importers and exporters should structure their contracts (CIF or FOB) from a GST perspective, be mindful of relevant court rulings and notifications, and have reliable records. Importers and exporters should also perform an assessment of the importer's eligibility for ITC and seek the services of tax professionals to gain current tax laws and continue to comply with and limit tax obligations.
Read more: How Do I File a Complaint about GST Fraud?
