The Goods and Services Tax (GST) gave a major boost to the ongoing ‘Make in India’ initiative. In the age of globalization, cross-border transactions hit massive increase and hence It is important to understand and analyses the applicability of a goods and services tax (GST) on cross-border transactions. This is a discussion on various situations on cross border transactions.

1.Intermediary Services in relation to Cross Border transaction

The term intermediary has been defined in sub-section (13) of section 2 of the IGST as under

“intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.

As there were lots of ambiguity and confusions and dissenting judgments brought need for clarification to Intermediary Services. Circular No. 159/15/2021- GST lays down check points for Intermediary Services.

• Minimum of Three Parties
• Two distinct supplies
  1. Main supply, between the two principals
  2. Ancillary supply, which is the service of facilitating or arranging the main supply between the two principals.
• Intermediary service provider to have the character of an agent, broker or any another similar person:
• Does not include a person who supplies such goods or services or both or securities on his own account
• Sub-contracting for a service is not an intermediary service

Analysis of the various situations

1. Commission paid to Foreign Agent with connection to Intermediary Services

For taxability of GST in respect to the Export commission three criteria shall be fulfilled

• • Whether commission Agent for Export commission covered within the definition of the term ‘intermediary’ as provided under section 2(13) of the IGST Act, 2017

As explained above, Overseas Commission agent is covered the definition of the term ‘intermediary as provided under section 2(13) of the IGST Act 2017

• • Whether Service received by an applicant covered within the definition of the term ‘import of Services’ as provided under section 2(11) of the IGST Act, 2017

The services can be called as ‘import of services’ only when it is satisfied all the three following conditions

• • 1. 1. The supplier of service is located outside India
       2. The recipient of service is located in India
       3. The place of supply of service is in India.

The condition in case of Intermediary Service first two conditions get fulfilled as Supplier (Agent) is located outside India, Recipient of Services (Principle) Located in India but in respect of Condition iii, Section 13(8)(b) speaks about Place of supply in case of Intermediary service is Location of the supplier of such services. (Location of Agent/Intermediary) Thus the condition (iii) is not satisfied as the place of supply of service is not in India. Therefore, this is not an Import of Service.

• • Whether the applicant is required to pay GST on RCM basis under section 5(3) of the IGST Act, 2017 on commission paid to the Overseas Commission Agent.

Since the transaction is related to an intermediary service is out of the ambit of ‘import of services’ as discussed above, accordingly GST under reverse charge is not payable on the same. Related AAR – Dry Blend Foods Pvt Ltd. (GST AAR Uttarakhand)

2. Intermediary Services sourcing outside India

Services provided by an intermediary is exempt vide Entry No. 12AA of NN. 20/2019 IGST (R) when location of both supplier and recipient of goods is outside the taxable territory.

[Applicable from 01/10/2019].

2. Supply of Services to Distinct person outside India

Explanation 1 to Section 8 of the IGST Act, 2017 provides that where a person has an establishment in India and any other establishment outside India then such establishments would be treated as establishments of distinct persons.

Therefore, clause V of section 2(6) is not satisfied which says the supplier of service and the recipient of service are not merely establishments of a distinct person but distinct legal entities.

Thus, Supply of service to the distinct person outside India is not treated as Export.

However, Vide NN. 15/2018 IGST (R), Same is exempt Provided place of supply of Service is outside India in Accordance with Section 13 of IGST Act.

3. Amendment in the Schedule III to insert Entry nos. 7 and 8 for merchanting trade, supply of goods lying in Customs bonded warehouses, and high sea sales

Clause 32 of the Central Goods and Services Tax Amendment Act, 2018 (‘CGST Amendment Act’) inserted Entries no. 7 and 8 in the Schedule III to the CGST Act effective from February 01, 2019, which are reproduced hereunder:

“7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

8. (a) Supply of warehoused goods to any person before clearance for home consumption;

8. (b) Supply of goods by the consignee to any other person, by the endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.”

After this clause has been added in Schedule III, the above transaction like Merchant Trade, Supply of Goods from Custom bonded warehouse and High Sea sales is neither Supply of goods nor supply of Service in terms of section 7(2)(a) of the CGST Act.

4. Ocean freight.

Inbound Ocean Freight

Taxability of ocean freight has been the matter of dispute in India for some time now. In case shipping line is based outside India, importers are required to pay IGST @ 5% on ocean freight services under the Reverse Charge Mechanism (RCM). IGST on ocean freight can be seen in two different scenarios based on transaction value of imports.

1. Where goods are imported on FOB value: Importers are required to pay IGST either under forward charge or reverse charge based on the location of shipping line whether in India or Outside India.

2. Where goods are imported on CIF value: If the shipping line is in India, Importer is required to pay GST on forward charge. However, if shipping line is based outside India is a subject matter of litigation. Further it is clarified from Notification 11/2023 – Integrated Tax (Rate) the government has exempted payments made for goods imported through ocean freight from 5 per cent integrated GST with effect from October 1.

In simple terms, the notification states that there will be no levy of IGST on ocean freight services provided for the transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. In other words, the tax previously applicable to such services is now exempted.

Outbound Freight

The CBIC vide it’s Notification number: 02/2018 (C-Rate) IGST, dt 25/01/2018 granted complete exemption from IGST liability, in terms of powers vested under Section 11 of CGST Act 2017 for out bound international freight with a sunset clause upto 30 September 2018. It was extended time and again further till 30.09.2022.

Now, consequent upon expiry of the validity of the said exemption notification which came with the sunset clause as on 30/09/2022 the following supplies have become taxable with effect from 01st October 2022 and would be subjected to levy of GST as no further extension of exemption has been notified

Analysis of the various situations

TCS on Foreign Remittances towards Liberalised Remittance Scheme (LRS).

The Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI) allows resident Indian individuals to remit a certain amount of money during a Financial Year to another country for investment, expenditure and other permissible reasons. According to the prevailing regulations, resident Indian individuals may remit up to an amount equal to $250,000 per Financial Year.

Finance Act, 2023 (FA 2023) had amended section 206C(1G) of the income-tax Act, 1961 (ITA)1 , inter-alia, to:

1. Increase the rate of Tax Collection at Source (TCS) from 5% to 20% for remittance under Liberalised Remittance Scheme (LRS) as well as for purchase of overseas tour program package.
2. Remove the threshold of INR 700,000 for triggering TCS on LRS.

However, the above two changes did not apply where the remittance is for education and medical purpose.

In a Press Release dated 28 June 2023 wherein the following decisions were communicated

1. The threshold of INR 700,000 shall apply for a Financial Year (FY) on all LRS payments. Hence, for first INR 700,000 there shall be no TCS. Beyond this INR 700,000, the rates would be as follows:
   1. • 0.5% (if remittance for education is financed by loan taken from a financial institution);
      • 5% (in case of remittance for education/medical treatment);
      • 20% for others
   2. For purchase of overseas tour program package, the TCS shall continue to apply at the rate of 5% for the first INR 700,000 per individual per annum and the 20% rate will only apply for expenditure above this limit.
2. For purchase of overseas tour program package, the TCS shall continue to apply at the rate of 5% for the first INR 700,000 per individual per annum and the 20% rate will only apply for expenditure above this limit.

The Central Board of Direct Taxes (CBDT), vide Circular No. 10/2023 dated 30th June 2023, has extended the date of applicability of increased rate of Tax Collection at Source (TCS) under section 206C(1G) of the Income-tax Act, 1961 (ITA), from 1 July 2023 to 1 October 2023.

Highlights of the Circular:

The earlier and new TCS rates are summarized as below

Non-Applicability of TCS

It has been provided that if the remitter is liable to deduct tax at source under any provisions of the Income-tax Act, and has deducted such tax, then this TCS provision will not apply.

TCS applies only where remittance is made under the LRS.LRS Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.

TCS not applied to

• Central Government, State Government, an embassy, a High Commission, legation, commission, consulate, and the trade representation of a foreign State.
• A local authority as defined in Section 10(20) of the Act.
• Any person specified by the Central Government through a notification in the Official Gazette. However, no such person has been notified till date.

Applicability of GST

The GST will continue to apply on currency conversion and on Remittance Service Charge. The same will not be applied on the tax collection (TCS)

Due Dates of TCS Returns