In the last six months, the economy has indeed walked through unprecedented developments with the introduction of the Goods and Services Tax (GST). The law has evolved speedily in this short span based on continuous feedback from India Inc and active turnaround by the government.
A close look at the GST design shows that it intends to support thelogistics sector, as this is critical for the smooth functioning of GST regulations. Within this sector, the air cargo industry has witnessed significant change in its business dynamics.
The paradigm shift in taxability of outbound or export cargo services at 18 per cent from a no-tax position under the service tax regime has been a significant concern. Under the service tax regime, international air cargo industry functioned in isolation without any significant interaction with indirect taxes, since both inbound and outbound cargo operations were not subject to service tax.
The fact that GST is applicable on international air cargo operations has created a buzz in the cargo industry. While taxability is one aspect of the story, the larger debate looms around the legal relationship between cargo airlines and cargo agents/freight forwarders. Historically, air cargo industry have worked on an agency model where cargo agents procure bulk orders for the airlines and the agents earn a margin/commission on the same. In a number of cases, the cargo capacity is booked in the freight forwarders’ name and, hence, airlines do not have visibility of the actual shipper.
With the implementation of GST and export cargo being brought into the tax ambit, cargo airlines together with the agents have adopted a new position. Cargo agents are now being treated as customers for cargo airlines and the cargo agents are, in turn, treating the shipper as their customer. From the perspective of the shipper, all risks and liabilities associated with cargo transport would be borne by the cargo agents, who would in turn have the power to exercise their rights against cargo airlines.
Shift in relationship
It is indeed interesting to examine the tenability of the new position, given the historic behaviour between these parties. This new position means a paradigm shift from a principal-to-agent (P2A) relationship to a principal-to-principal (P2P) relationship. It is noteworthy that IATA issues certain regulations/resolutions which provide terms and conditions that airlines and accredited agents must comply. Therefore, examination of the impact of these resolutions in India on the relationship between the cargo airlines and agents is critical.
This relationship matrix gains significance as it would also redefine the GST compliance requirements for both the cargo airlines as well as the agents. Furthermore, the parties would need to make sure that their pricing/ margins under the adopted business models and positions are in line with the anti-profiteering provisions.
New invoicing mechanism
Further, IATA operates the Cargo Account Settlement Systems (CASS) which is designed to simplify the billing and settlement of accounts between airlines and agents/freight forwarders. With the implementation of GST and the new model adopted, revamping of the invoicing mechanism as well as CASS portal became inevitable. The CASS invoices are generated by IATA on a fortnightly basis containing the details of multiple AWBs issued by an agent in a fortnight. However, cargo agents have been demanding issuance of a separate tax invoice for each AWB due to the practical challenges in obtaining refunds and any subsequent debit/credit adjustments with respect to specific AWBs. The government has commented that the practice of fortnightly or monthly billing is acceptable, provided the time limit for issuance of invoices as stipulated under the GST laws is not breached.
Given the above, it becomes important that cargo airlines and agents reconcile the contractual and GST positions.
With passage of time, the risk of non-compliance with GST laws and processes would only increase. It is imperative for the industry along with the government to take necessary steps to determine the taxability and documentation.
The writer is Partner, Deloitte India. With inputs from Siddharth Tandon, Senior Manager, Deloitte
via Baggage of woes for international air cargo – Business Line