Introduction
Freight and insurance charges are often recovered from customers as part of the sale of goods. The question arises: How are freight and insurance charges treated under GST?
The answer depends on whether the freight and insurance are part of a composite supply of goods or a separate supply of services. This guide explains the legal framework and the landmark Supreme Court ruling in Union of India v. Mohit Minerals.
Legal Framework: Composite Supply Under Section 8
Freight as Part of Composite Supply
Where the supplier contracts to deliver goods and the freight is ancillary to that supply, the entire composite supply follows the principal supply's tax treatment. The freight component is included in the value of the goods and taxed at the rate applicable to the goods.
Separate Supply of Freight
Where the freight is a separate supply — for example, where the supplier arranges transportation on behalf of the customer — it may be treated as a separate supply of services.
The Mohit Minerals Ruling
Supreme Court Decision
The Supreme Court in Union of India v. Mohit Minerals (P.) Ltd. [2022] 138 taxmann.com 331 held that:
- In CIF (Cost, Insurance, and Freight) import contracts, the freight and transportation component forms an integral part of a composite supply of goods between the foreign exporter and the Indian importer.
- The Indian importer is not the recipient of the ocean freight service.
- Levy of IGST on ocean freight under reverse charge would violate the composite supply principle.
Bombay High Court Ruling
Following the Mohit Minerals ruling, the Bombay High Court in Midas Tankers (P.) Ltd. v. Union of India [2026] 186 taxmann.com 445 held that:
- The levy of IGST under forward charge on the shipping line in respect of CIF import transactions is not sustainable in law.
- The freight component is part of a composite supply of goods already subjected to customs duty.
- Dual levy of customs duty (including freight) and IGST on freight would be contrary to the statutory scheme.
GST on Freight and Insurance Recovered from Customers
For Domestic Supplies
Where the supplier recovers freight and insurance from the customer as part of the sale of goods:
- The freight and insurance are included in the value of supply under Section 15(2)(c).
- The entire supply is taxed at the rate applicable to the goods.
For CIF Imports
- The freight component is part of the composite supply of goods.
- No separate IGST is leviable on the freight component.
- The importer is not the recipient of the ocean freight service.
GST Rate on Freight Services
Where freight is a separate supply of services:
- GTA Services: 5% GST under reverse charge.
- Other Freight Services: 18% GST.
Documentation Required
- Supply Agreement: Documentation of the supply terms.
- Invoice: Invoice showing the freight and insurance charges.
- Bill of Lading: For import transactions.
- Customs Documents: For CIF imports.
Best Practices
- Determine the Nature of Supply: Assess whether freight is part of a composite supply or a separate supply.
- Document the Agreement: Clearly document the freight terms.
- Maintain Records: Document all freight and insurance charges.
- Seek Professional Assistance: For complex freight arrangements, seek guidance.
Conclusion
Freight and insurance recovered from customers are generally part of the composite supply of goods and taxed at the rate applicable to the goods. The Supreme Court in Mohit Minerals has clarified that ocean freight in CIF imports cannot be taxed separately. Proper documentation is essential.
Recovering freight and insurance from customers? Anuj Desai & Associates provides expert guidance on GST treatment. Contact us today.
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