gst question
Yes, GST is applicable on freight charges collected from customers and included in invoices.
To understand this, it is necessary to examine the relevant provisions of the GST law.
Meaning of Freight Charges
Freight charges are expenses incurred by a business for transportation of goods from the supplier’s place to the recipient by road, rail, air, or water.
The applicability of GST on freight depends on
- Whether freight forms part of the value of supply (Section 15)
- Nature of the supply (composite or independent)
Whether freight forms part of the value of supply (Section 15)
As per Section 15(2)(c) of the Central Goods and Services Tax Act, 2017, the value of supply shall include any amount charged for anything done by the supplier in respect of the supply of goods or services before delivery.
Since transportation is undertaken in connection with the supply and before delivery, such charges are included in the value of supply.
Therefore, whenever freight is charged by the supplier in relation to the supply of goods, it forms part of the value of supply under Section 15, and GST is payable on the combined value.
Nature of the supply
Under GST, the taxability of freight depends on whether it is part of a composite supply or an independent supply of service as per the provisions of the Central Goods and Services Tax Act, 2017.
Composite Supply
A composite supply involves two or more supplies (goods or services or both), which are:
- Naturally bundled, and
- Supplied together in the ordinary course of business,
- Where one is the principal supply
The principal supply is the main element of the transaction, and the other supplies are ancillary or incidental to it.
In the case of supply of goods:
- Freight is an ancillary (incidental) service
- Goods are the principal supply
Therefore, when freight services are provided along with goods, it forms part of a composite supply and is taxed at the same rate as goods.
Independent supply
Freight is treated as an independent supply of service when:
- Transportation is provided separately from sale of goods, or
- A Goods Transport Agency (GTA) provides transport service independently
When transportation is provided separately from the supply of goods, it is treated as an independent supply of service and taxed accordingly.
When freight is charged by a Goods Transport Agency (GTA) as an independent service:
GST is governed by Section 9(3) – Reverse Charge Mechanism, accordingly relevant rates will apply based on the provisions.
For GTA services, two rates are applicable:
- 5% under Reverse Charge Mechanism (RCM) payable by the recipient in specified cases
- 12% to be paid by GTA under Forward charge mechanism
Supplier Not providing transport
When the buyer arranges transportation and freight is not part of the supplier’s invoice:
- The supplier does not charge GST on freight
- Freight and its GST (if applicable) are borne directly by the buyer
Conclusion
GST is applicable on freight charges billed to customers.
- If freight forms part of a composite supply, it is taxed at the rate of the principal supply
- If freight is an independent service (GTA), it is taxed separately under applicable GST provisions
- If buyer arranges transport, freight is outside the supplier’s supply