The Indian freight forwarding and logistics sector is set to lose a major chunk of Rs 20,000-crore international freight forwarding business to international competitors because of a tax parity issue following the roll-out of the goods and services tax (GST) regime.
By virtue of Section 13 (9) in the Integrated Goods and Services Tax (GST) Act, 2017, an Indian freight forwarding company has to levy GST on all shipments to India to an overseas supplier. However, the overseas company is not faced with any incidence of tax on the same transaction if it chooses to work with a foreign freight forwarder. It implies that Indian freight forwarders are losing their edge when competing with foreign freight forwarders for transactions involving imports to India.
Nailesh Gandhi, director, Express Global Logistics, told FF that overseas suppliers to India usually prefer Indian freight forwarders because of their familiarity with the Indian customs procedures, documentation and other formalities. Gandhi said, “This is a business that had been gaining traction over the last seven-eight years. However, since an overseas company cannot claim input credit, they have stopped preferring Indian freight vendors.”
Amit Bhagat, partner, indirect tax, PwC, said Indian freight and logistic companies will possibly see their business from overseas suppliers slip away since a foreign freight forwarder is in a better position in the GST regime. “Loss of business in India would also mean loss of direct tax payments since the income is no longer earned in India when contracts are given to foreign freight forwarders.”
Indian freight companies are also at a disadvantage with respect to exports of goods. Section 13 (3) of the IGST Act provides for tax on services performed on the goods, such as value-added services like packaging, labelling or painting. However, Gandhi says customs officials are levying tax on services that are performed for goods such as customs clearance, transportation, loading, unloading, etc, and not strictly on goods.
Deepak Mata, Assistant Director, National Academy of Customs, Indirect Taxes and Narcotics, Mumbai, opined that the issue is one of interpretation. He said, “The GST committee on exports may look into the issue if the freight forwarders make a representation and bring their concerns in front of the committee. As it stands, Indian freight forwarders may genuinely be having a few concerns in business due to place of supply interpretation issues.”
The Indian freight forwarding industry is a hugely fragmented one. Estimates are that there are approximately 50,000-70,000 small and medium enterprises (SMEs) in the sector who have a lion’s share of the approximately Rs 20,000-crore international cargo business annually.