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High Seas Supply under GST
Akella A S Prakasa Rao, Tax Professional
India is witnessing a historic event in Indirect Tax arena and we are at the cusp of transition into GST era. The persons who have toiled hard to put in place the necessary legislation have done fabulous job in bringing into shape the draft legislation. This effort can best be described to be next only to drafting of the Constitution of India. India being a federal republic, the powers to levy indirect taxes were there for both central government and the respective state governments also. Hence the GST is a concurrent levy by both the authorities. Let us take up one transaction for a detailed analysis, which has become unviable under GST law. We are referring to High seas supply.
High Sea sale is a transaction, wherein there is transfer of ownership, when the goods are on high seas. The taxable event is transfer of ownership and hence the tax to be levied will be either VAT/CST. Since the transaction is happening on the high seas, where the state governments do not have jurisdiction it cannot attract VAT and since the transaction is not between two states in India, it neither attracts CST. The CST Act is a central act, but the power to levy and collect the taxes is with the state governments. According to Sec 5(2) of CST Act, 1956:
(2) A sale or purchase of good shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.
The first limb of the above Sec 5(2) talks about the sale in the course of import and the second limb is for high sea sales, where the sale is effected by transfer of documents before the goods cross the customs frontiers of India.
...The definition of Crossing the customs frontiers of India was inserted by Act 103 of 1976 under the Act, 1956 to overcome the decision in the matter of DAVERS (1969) 24 STC 481 SC. Article 286 of Constitution of India prohibits imposition of tax on the sale or purchase of goods in the course of import of the goods into or export of the goods out of the territory of India. Hence in the current tax legislation, high sea sales are exempt from the levy of VAT/CST. Famous case on high sea sales is the SC decision in the matter of MMTC Vs the Sales tax officer & others (1998) 111 STC 434 (SC).
Let us now proceed to examine certain definitions under various acts in order to understand the status of high seas supply under GST, as the taxable event under GST is not sale but supply.
India has been defined to include the territorial waters of India under Sec 2 (27) of Customs Act, 1962.
Territorial Waters of India - Territorial waters means that portion of sea which is adjacent to the shores of a country. On 22nd March, 1956, President of India had issued a proclamation that territorial waters of India shall extend upto 6 nautical miles from the base line. This was extended to 12 nautical miles w.e.f. 30th Sept., 1967. Later, ‘Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976' was passed. Section 3 of the said Act specify that territorial water extend upto 12 nautical miles from the base line on the coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms).
Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.
...INTERNATIONAL CONVENTION - United Nations Convention of the Law of the Sea dated 7th October, 1982 has been signed by most of the countries. This convention uses the words ‘territorial sea', which is analogous to the term ‘territorial waters' used in Customs Law. As per article 2(1) of this convention, Sovereignty of a coastal state extends beyond its land territory upto `territorial sea'. The sovereignty extends to airspace over the territorial sea as well as to sea bed. Vide article 3 of the Convention, territorial sea extends upto 12 nautical miles from normal baseline. Base line is the low-water line along the coast. As per article 17 of the Convention, ships of all countries have right of innocent passage in the territorial sea. Article 21(1) specifically provides that coastal State may adopt laws and regulations in conformity with this convention.
‘Exclusive economic zone' extends to 200 nautical miles from the base-line. In this zone, the coastal State has exclusive rights to exploit it for economic purposes like constructing artificial islands (for oil exploration, power generation etc.), fishing, mineral resources and scientific research. However, other countries have right of navigation and over-flight rights. Other countries can lay submarine cables and pipelines with consent of Indian Government. Such consent may be declined for protecting interest of India. Section 7 of Territorial Waters - . - . - . - Act, 1976 has made similar provisions and thus, these provisions have been adopted in India too. Beyond 200 nautical miles, the area is ‘High Seas', where all countries have equal rights. These high seas are reserved for peaceful purposes. Any Country can use it for navigation, over-flight, laying submarine cables and pipes, fishing, construction of artificial islands permitted under international law and for scientific research.
...EXTENSION OF CUSTOMS ACT, SERVICE TAX AND EXCISE ACT TO DESIGNATED AREAS IN EEZ – Customs Act has been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India vide notification No. 11/87-Cus dated 14-1-1987 and 64/97- Cus dated 1-12-1997. Similarly, Central Excise Law and Service Tax (Chapter V of Finance Act, 1994) have been extended to designated areas in Continental Shelf and Exclusive Economic Zone of India vide notification No 166/87-CE dated 11-6-1987 and 1/2002-ST dated 1-3-2002 respectively. Vide notification No. SO 189(E) dated 7-2-2002 issued by Ministry of External Affairs, Customs Act and Customs Tariff Act has been extended to whole of Exclusive Economic Zone (EEZ) and continental shelf of India for the purpose of processing for extraction or production of mineral oils and Supply of any goods in connection with processing for extraction or production of mineral oils. This has following implications – (a) Supplies from India in connection with production of mineral oils within EEZ and/or continental shelf of India shall not be treated as export and will not be entitled to export incentives. (b) Supplies of goods (for extraction or production of mineral oils) from other countries to units in this zone will be treated as import and duty will be levied accordingly. [Earlier, vide MF(DR) circular No. 17/2002-Cus dated 13-3-2002, it was stated that mineral oil produced within territorial waters are leviable to central excise duty. This circular has been rescinded, probably because though Customs Act has been extended but Central Excise Act has not been extended].
In a further circular No. 638/29/2002-CX dated 22-5-2002, it has been clarified that Excise duty is not payable on LSD or HSD supplied to research vessels operating in territorial waters. However, if the vessels are engaged in exploration or extraction of mineral oil within EEZ or continental shelf, then no export has taken place and duty free supply of fuel is not permitted.
...Indian Customs Waters - Section 2(28) define that 'Indian Customs Waters' means the waters extending into the sea up to the limit of contiguous zone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and includes any bay, gulf, harbour, creek or tidal river. As per provisions of that Act, contiguous zone of India comes immediately after territorial waters. The outer limit of contiguous zone is 24 nautical miles from the nearest point of base line. Thus, area beyond 12 nautical miles and upto 24 nautical miles is 'contagious zone of India'. The Central Government has powers to take measures in this area for security of India and immigration, sanitation, customs and other fiscal matters. [Section 5(4) of Territorial Waters - . - . - . - Act, 1976]. Thus, 'Indian Customs Waters' extend upto 12 nautical miles beyond territorial waters.
Significance of definition of 'Indian Customs Waters' is as follows -
Customs Officer has powers to arrest a person in India or within Indian customs waters. [Section 104]. Customs officer has powers to stop and search any vessel in India or within the Indian Customs waters. [Section 106]. If such vessel does not stop, it can be fired upon. If a vessel does not stop, it can be confiscated [Section 115(1)(c)]. A vessel which is within Indian customs waters or which has been in Indian Customs Waters can be confiscated which is constructed or fitted in any manner for purpose of concealing goods. [Section 115(1)(a)]. Thus, powers of customs officers extend upto 12 nautical miles beyond territorial waters.
CGST Act, 2017 defines India under Sec 2(57) as under: “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters.
...Sec 2 (103) of CGST Act, 2017 defines State includes a Union Territory with legislature.
Sec 2(4) of IGST Act, 2017 defines Customs frontiers of India means the limits of a customs area as defined in Section 2 of the Customs Act, 1962 (52 of 1962).
Sec 9 of IGST Act, 2017 defines Supplies in territorial waters as under:
Notwithstanding anything contained in this Act, -
(a) Where the location of the supplier is in the territorial waters, the location of such supplier; or
(b) Where the place of supply is in the territorial waters, the place of supply,
Shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
Now let us analyse the various modes of high seas supply under GST:
- Buyer, seller and port of import in the same state: Since both the buyer and seller are registered under GST, any high seas supply happening beyond the territorial waters would be levied with IGST and the same would be available as ITC. In case the high sale happens within the territorial waters, then CGST + SGST will apply and the same would be available as input credit. Subsequently the import duty of BCD + IGST would also be applicable and the IGST part of the import duties would be available as ITC
- Buyer in one state and seller and port of import in another state: The taxes paid for high seas supply would be cost to the buyer and the IGST on import duty is available as ITC.
- Buyer and port of import in one state and seller in another state: All taxes paid are available as ITC, except the BCD.
The above concept is illustrated hereunder:
Transaction type |
Tax on High seas supply taking place within territorial waters |
Tax on High seas supply taking place beyond territorial waters |
Tax on import |
ITC eligibility |
Buyer, seller and port of import in the same state |
CGST + SGST |
IGST |
BCD + IGST |
All taxes are creditable except BCD |
Buyer in one state and seller and port of import in another state |
CGST + SGST |
IGST |
BCD + IGST |
BCD, CGST + SGST will not be creditable and only IGST is creditable |
Buyer and port of import in one state and seller in another state |
CGST + SGST |
IGST |
BCD + IGST |
All taxes are creditable except BCD |
Buyer, seller and port of import are all in three different states |
CGST + SGST |
IGST |
BCD + IGST |
BCD, CGST + SGST will not be creditable and only IGST is creditable |
Buyer and seller in the same state and port of import is another state |
CGST + SGST |
IGST |
BCD + IGST |
BCD, CGST + SGST will not be creditable and only IGST is creditable |
The above illustration clearly establishes that the high seas
supply is viable only when undertaken beyond the territorial waters
or in a case when buyer, seller and the port of import are in the
same state or when the buyer and port of import are in the same
state.
The other important point would be that the seller has to undertake registration in the port of import, if the high seas supply exceeding INR 20 lakhs is contemplated within the territorial waters of India, which increases his compliance burden.
In addition, the following practical difficulties are also foreseen:
- What is the place of supply in high seas supply? How to decide which border state CGST + SGST is to be applied when the ship is on the high seas?
- What is the time of supply in case of high seas supply? Is it the time of signing the high seas supply agreement and if so, who is to record it?
- What is the mechanism by which the GST authorities will assess such high seas supply considering the fact the ship is continuously in motion?
- High seas supply is resulting in tax cost in certain cases and if so, will it be legally valid to discriminate the buyer for availing the ITC only in certain cases?
- Any high seas supply is resulting in two tax levies one under GST and the other is import duties resulting in cash flow issue for the trade. The seller is forced to take registration either as casual or regular assessee in the state of import in all cases, where the transaction is exceeding the SSI limit under GST. This increases the compliance burden.
The intention of the author is only to bring these practical difficulties on high seas supply under the GST law to the attention of the law makers and to the trade, so that the same can be remedied before the rollout of GST by the law makers and appropriate representations can be made by the trade.
Currently the matter of tax on sale in the territorial waters is pending with Supreme Court.
...Any legislation on a sub-judice matter will add further litigation.
A possible solution to these issues lies in exempting the high seas supply both within and beyond the territorial waters, so that there is no double taxation leading to working capital blockade or GST paid on high seas supply being cost in certain cases as illustrated above. At the same time, suitable legislation can be made in the respective SGST Laws to the effect that all supplies from the Border States continue to be taxed as intra-state supplies if made within the territorial waters in order to satisfy the demand made by the Border States with GST Council. This may save the unwanted litigation in high seas supply under GST.
Let us hope wisdom prevails.
(The author has deep expertise in managing indirect taxes for the pharmaceutical industry and is currently working with a leading biopharmaceutical company. The views in the article are author’s personal and do not reflect the views of the organization, he is working for. The article has not been offered for publication in any other media prior to this.)
Comments
Excellent article