The government of India rolled out Goods and Services Tax to overcome the challenges faced by the taxpayers under previous indirect tax regime. The issues like tax on tax and multiple taxes resulted in taxpayers paying higher taxes. Furthermore, increased compliance with regard to filing multiple tax returns lead to delays and increased non – payment of taxes.
With the advent of GST, the government is on the path of bringing a common national market with unified tax rates. Further, it has been able to reduce tax compliance and simplify return filing by going online with GST. Although this has led to increased transparency and easy return filing relative to previous tax regime. There is still a whole lot that government intends to do over time via modifications in the GST Council Meetings.
You May Also Read
36th GST Council Meeting: Key Highlights
Needless to say, GST and its benefits have impacted taxpayers across the nation and various industries. Some of these include:
- Restaurant Owners
- Packaged Food Industry
- Job Workers
- Real Estate Business Owners
- Handicraft Industry
- Tourism Industry
- Small Business Owners (Registered Under Composition Scheme)
- E- Commerce Sellers
In this article, we will see how imports are taxed under GST. Therefore, we first need to know what constitutes import of goods and services and the nature of such supplies under GST.
Nature of Supply in Case of Imports
Article 269A of the constitution provides for the nature of supply of goods and services imported into India. As per this article,
“any supply in the course of import into India shall be taken as supply in the course of interstate trade.”
Here supply includes the supply of goods or services or both.
In other words, any imports made into India would be deemed as interstate supplies under GST. And Integrated Goods and Services Tax (IGST) shall be levied on such supplies since imports are treated as interstate supplies .
Section 7(2) of the IGST act further provides that any supply of imported goods that takes place before such goods cross India’s customs frontiers are deemed as interstate supplies.
The goods and services tax (GST) divides all sales into two types of transactions — interstate and intrastate. Imports are treated as interstate sales, which means that they’re subject to integrated tax, or IGST. That means when you import products, you pay one IGST rate to the central government. The money is then split between the central and your state government, which is considered on the basis of the place of supply. That way, you don’t need to worry about paying separate state and central taxes.
What is Import of Goods Under GST?
As per the IGST act 2017, import of goods is defined as “bringing goods into India from a place outside India.” Now, let’s understand how import of goods are taxed under GST given this definition in the backdrop.
Taxes for Imported Goods
IGST is charged on imports since such supplies are deemed as interstate supplies. This is in addition to the applicable custom duties.
Section 5(1) of the IGST act provides for circumstances when IGST would be applicable. It states IGST is charged on all interstate supplies (goods or services or both) except the supply of alcoholic liquor for home consumption. Provided IGST on imported goods is charged:
- and collected according to the provisions of section 3 of the Customs Tariff Act, 1975 and
- on such a value as is decided under tariff act at a time when duties of customs are charged on such goods under Customs Act 1962.
The above provision suggests that IGST is collected and paid only along with customs duty. In other words, it cannot be collected anytime before. Custom duty is collected and paid only at the time goods clear customs frontier.
Thus, IGST on import of goods is charged in addition to the Basic Customs Duty (BCD). BCD is charged on goods that are imported into Indian territories under the Custom Tariff Act.
Further, in addition to IGST and BCD, GST Compensation Cess is also charged on certain luxury and demerit goods under the GST ( Compensation to States) Cess act, 2017.
How are IGST and Cess Levied on Imported Goods?
IGST is charged on goods imported into India in addition to the Basic Custom Duty. Hence, the value of goods for calculating IGST is taken as:
Value of Goods for Calculating IGST = the Assessable Value of Goods + Basic Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law for the time being in force
Similarly, the value of goods on which GST Cess is calculated is:
Value of Goods for Calculating GST Cess = the Assessable Value of Goods + Basic Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law for the time being in force
As you can see, IGST is not added to the assessable value of goods for calculating GST Cess.
Let’s consider an example to understand how IGST is calculated on import of goods.
Example for Calculating IGST on Import of Goods
Say for instance, the value of goods imported into India is Rs. 10,000. Following are the rates of duties and taxes leviable on such imported goods:
- Basic Custom Duty @ 10%
- Education Cess @ 3%
- IGST @18%
- Compensation Cess @ 15%
Given this case , let us see how IGST and Compensation Cess would be calculated on the import of goods:
Assessable Value = Rs. 10,000
Basic Custom Duty (BCD) = Rs. 1000 (0.10 x 10,000)
Education Cess (E. Cess) = Rs. 30 (0.03 x 1000)
Value on which IGST is charged = Rs. 11,030 (Rs. 10,000 + Rs. 1000 + Rs. 30)
IGST = Rs. 1985.4 (0.18 x 11,030)
Value on which Compensation Cess is charged = Rs. 11,030 (Rs. 10,000 + Rs. 1000 + Rs. 30)
Compensation Cess (C. Cess) = Rs. 1654.5 (0.15 x 11,030)
Total Duty to be Paid = Rs. 4669.9 (BCD + E.Cess + IGST + C.Cess)
It must be noted that there are certain imported goods on which Anti Dumping Duty or Safeguard Duty is also charged. In such cases, the value of goods for the purpose of calculating both IGST and Cess would also include Anti Dumping Duty or Safeguard Duty.
Value of Goods for Calculating IGST and Compensation Cess = the Assessable Value of Goods + Basic Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law for the time being in force + Anti Dumping Duty + Safeguard Duty
Is IGST Levied on Passenger Baggage?
Passenger Baggage is not subject to IGST and Compensation Cess. That is, full exemption is provided from IGST on passenger baggage. However, Basic Custom Duty at the rate of 35% is charged. Further, education cess is also applicable on a value over and above the duty free allowances provided under Baggage Rules, 2016.
IGST on Goods that are Imported into India, Stored into a Warehouse and are Sold While in the Warehouse Before Clearance from Customs
According to the Customs Tariff Act 1962, goods can be removed from the custom station to warehouse without payment of duty. The importer can deposit the goods at the customs designated warehouses from the custom station with no payment of duty.
The tariff act has been modified to include ‘warehouse’ in the definition of the ‘custom area’.
Section 2(11) of the Customs Tariff Act defines ‘Customs Area’ as “an area of custom station. It includes any area in which imported goods or export goods are kept before clearance by customs authorities. Customs further include warehouse.”
Section 13 of the Tariff act defines ‘customs station’. It includes “any customs port, customs airport, international courier terminal, foreign post office or land customs station.
However, these warehoused goods could be transferred from importer to any other person. This sale or transfer may take place at a price higher than the assessable value of these goods. Now, the transaction of such a nature would be deemed as supply. And, therefore, would be taxed under IGST act, 2017.
As mentioned above, any supply of imported goods before such goods cross the custom frontiers are taken as interstate supplies. Therefore, warehoused goods sold to another person by the importer would be charged IGST.
IGST on High Sea Sales
It is important to know what constitutes High Sea Sales before understanding the applicability of GST on such sales. High Sea Sales mean sales undertaken by the original importer to a third person while the goods are still on the high seas. This includes the sales that take place after the goods have left the port of loading and before they reach the port of arrival.
This means that goods are sold by the original importer before such goods enter the custom frontiers for clearance. That is, the title of goods is transferred to the third person. Therefore, it is the third person who files custom declaration, that is the Bill of Entry, after the High Sea Sales are undertaken by the importer. And IGST is charged and collected only when the import declaration is filed by the third person before customs authorities for customs clearance. Any value addition to such a high sea sale would be included in the value of goods on which IGST is calculated.
ITC of Integrated Goods and Services Tax (IGST)
The importer can claim the credit of the IGST and Compensation Cess paid at the time of imports. Further, he can utilize such a credit to make payment of taxes on his outward supplies. Both IGST and Compensation Cess can be utilized towards making payment on taxes for outward supplies.
However, the ITC of Compensation Cess can be used only for the payment towards Compensation Cess.
Further, as per IGST act, the place of supply of imported goods is taken as the location of the importer. Thus, if the importer is located in Maharashtra, the state tax portion of the IGST is given to the State of Maharashtra.
Import of Services
The IGST act 2017 defines import of services as supply of any service where the:
- supplier of said service is located outside India
- recipient of the said service is located in India and
- place of supply of the said service is in India
Further, the nature of service imported, its underlying consideration and purpose determine if a particular import of service can be treated as supply. Here are the various scenarios defining when an import of service is deemed as a supply:
Case I: Import of Service for Consideration Whether or not in the Furtherance of Business
Say there is an import of service. Further, such an import is for consideration but may or may not be in furtherance of business. Thus, the import of service in such a case is considered as a supply.
This implies that any import of service that takes place without consideration is not considered as supply. It is not necessary that an import of service in exchange of consideration is done for the furtherance of a business.
Case II: Import of Services by a Taxable Person from a Related or Distinct Person
Say there is an import of service by a taxable person from a related or distinct person as defined in section 25 of CGST act, 2017. Further, such an import of service is in furtherance of business and may or may not be undertaken for a consideration. Such an import of service is considered as a supply.
IGST on Import of Services
All import of services are subject to integrated tax under IGST act, 2017. The importer of services, thus, is liable to pay IGST on reverse charge basis.
However, there are cases when Online Information and Database Access or Retrieval Services (OIDAR) are imported by unregistered, non – taxable recipients. In such a case, the supplier located outside India is liable to pay IGST. If the supplier is unable to take registration and pay IGST, he will have to appoint a person in India and pay the taxes.
This is done to make sure that importer is not required to pay IGST while removing goods from custom station to warehouse.