Unraveling the Impact of GST on High Sea Sales

Sometimes the original importer arranges to sell the imported goods to another buyer before they reach in Indian Territory. Such sales are considered as high sea sales.  In simple terms, High sea sales are the sales where the buyer of the goods sells the goods to another person while the goods are still in transit. In this article we will discuss in detail about the high sea sales transactions and the implications of GST on such types of transactions.

Before discussing the GST impacts on transactions like high sea sales, Let us understand the term high sea sales with an example like, the importer from Haryana want to import some goods from USA hence placed an order of such goods, while the goods were in transit and before crossing the customs frontiers of India, the said goods were sold to a buyer in China. This transaction would be considered as high sea sale.  

The Schedule III of CGST Act 2017 contains the list of activities or transactions which shall neither be treated as a supply of goods nor a supply of services. The para 7 & 8 of Schedule III is laid down as follows;
“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;
(b) Supply of goods by the consignee to any other person, by 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”

From the above, it is clear that if the goods are sold from one non taxable territory to another non taxable territory and where the imported goods are sold before clearance for home consumption, then such transactions shall not be considered as supply of goods or supply of services. Hence high sea sales would be covered under schedule III and accordingly GST would not be leviable on such transactions.

It is to be noted that there is the difference between import and high sea sales and accordingly, the import agreement and high sea sale agreement are also different. In case of import of goods, the goods are received by the importer from the port of discharge and the importer and acknowledge his ownership over the consignment of goods.  However, in the case of high sea sale transactions, the original importer sells the goods to his customer, while the goods are still on high seas. Thus, unlike regular import of goods, the original importer himself doesn’t bring the goods into the territory of the country. The ownership and title in the goods are transferred to the buyer of the original importer. As per the provisions of the Customs Act, person importing the goods has to pay the Customs duty. The final buyer must have all important documents evidencing high sea sales. They are the original import invoice, the high sea sales agreement, the invoice from the original Importer (Original Buyer) along with Bill of Lading, Bill of Entry and Certificate of Origin etc.

Till now, we have made a detailed analysis of high sea sale. Now we proceed further regarding the eligibility of ITC used to effect the High Sea Sales. Since the high sea sale transaction is covered under schedule III and no GST is leviable on such transaction, whether input tax credit used to effect High Sea Sales is to be reversed considering such supply is an exempted supply?

Section 17 of the CGST Act prescribes the provisions for the apportionment of credit and blocked credits. Sub-section 17(2) restricts input tax credit for the goods or services, or both used for effecting exempted supplies under this Act. The section 17(2) of CGST Act 2017 states that;
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”

As per  Section 2(47) of CGST Act 2017 “exempt supply” are those supplies which attracts Nil rate of tax, or which are wholly exempted from tax under Section 11 or under Section 6 of IGST Act and includes non-taxable supplies.

Section 7(2) provides that the activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. The High Sea Sales are not covered under the definition of exempt supply, even such sales under GST are not considered as supply at all. Hence there is no question of reversal of the ITC as per Section 17(2).

Further, according to the Explanation given to the sub-section 17(3), “value of exempt supply’ shall not include the value of activities or transactions specified in Schedule III and excludes exemption only for the activities or transactions under paragraph 5 and clause (a) of paragraph 8 of the schedule for reversal of ITC for the exempted supplies. Hence, it is clear that there is no need to reverse ITC for effecting High Sea Sales under this Act.

The last question that arises in respect of high sea sale is that “under which column of GST returns (GSTR-1 & GSTR-3B) such sales are required to be reported”. To answer such question it is important to know that in GST returns, we have to show the different types of supplies like supply of goods/services made within the states i.e., intra sate supplies, supply of goods/services made in different states i.e., inter state supplies, zero rated supplies, supplies made to un registered persons, supplies on which RCM is applicable etc. In other words we have to report the supplies of goods or services  in GST Returns. As the high sea sales are neither supply of goods nor supply of services, hence supplies are not required to be shown in GST returns.

Conclusion:

Under GST, High sea sales are covered under schedule III of CGST Act 2017, hence would not be considered as supply of goods or supply of services, accordingly GST would not be applicable on such transaction. There is no need to reverse ITC in respect of goods or service used for executing the high sea sales. Also such sales are not required to be shown in GST returns. 

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.