Indian shipping tonnage is facing a taxing time

The tonnage tax regime for Indian shipping companies, introduced in 2004 with a lot of fanfare, has turned out to be a disappointment. The companies, which happily moved to the new tax regime, are now expanding their operations through foreign subsidiaries by flagging their ships abroad following a slew of new taxes introduced by the government in subsequent years, which make their operations in India uncompetitive.
After the introduction of tonnage tax and before the industry could settle down to the new tax regime, New Delhi made the industry liable for new levies in the form of Fringe Benefit Tax (FBT) and service tax, which, according to industry officials, are unreasonable.
Anil Devli, chief executive officer of the Indian National Shipowners’ Association (INSA), told Cargonews Asia, “Though the tonnage tax has helped the Indian shipping industry, like all shipping companies globally, other taxes such as service tax, minimum alternate tax and withholding tax imposed in the following years has denied Indian shipping companies the benefit of a pure tonnage tax regime. Tonnage tax now accounts for merely 10 percent of the total tax paid by shipping companies.”
“Our biggest grouse is the service tax and seafarer’s tax,’’he added. These taxes are not aligned to the tonnage tax scheme prevailing in developed countries. Contrary to the methodology adopted by major maritime nations, profit on sale of ships in India is separately taxed as income from capital gains and is subject to Minimum Alternate Taxes (MAT).
In a bid to gain a level playing field as many as 10 major Indian players such as Mercator Shipping, Varun Shipping, Tolani Shipping, Essar Shipping & Logistics, West Asia Maritime and Garware Shipping have set up subsidiaries outside India. Most Indian shipowners today feel that running an Indian-flagged ship is a nightmare due to adverse market conditions and multiple levies. And while the freight market has been at a low point, operating costs have soared.
Tonnage tax for shipping companies, including dredging companies, was introduced in India by the Finance Act 2004, when a government appointed committee found that because of combined effect of nearly a dozen different taxes, Indian shipping was at a disadvantage in competing internationally. In an effort to lower the burden of income tax, tonnage tax was introduced from the financial year 2005-06.
The local industry heaved a sigh of relief with the introduction of the tax, which brought down the income tax impact to nearly four to five percent of profits compared to 10-12 percent previously. There is a lock-in period of 10 years for making use of tonnage tax. If a company opts out of tonnage tax, it will be debarred from re-entry for 10 years.
“Tonnage income is taxed at the normal corporate tax rate. But tax is payable even if a company makes a loss in a particular year,” said a chief executive of a Mumbai-based shipping company.
As many as 59 Indian shipping companies such as the Shipping Corporation of India (SCI), Great Eastern Shipping, Essar Shipping, Mercator and Dredging Corporation of India (DCI) have adopted the tonnage tax regime despite a hike of 51 percent in the 2012 budget.
A senior official from SCI told Cargonews Asia, “Tonnage tax has definitely helped Indian shipping companies. Now the times are bad and all are feeling the pinch. It is true that indirect taxes are burdening the industry. Though this issue has been time and again raised by INSA, the government has not given a positive reply. Also, unlike other developing countries, the industry here is given no cargo reservation.
According to Devli, the introduction of other taxes has made life difficult for Indian shipping companies. “In this industry investments are on a long-term basis. The industry is now going through a bad phase, but it will eventually recover,’’ he said.
The gross tonnage of the Indian fleet, which was at 0.19 million following independence in 1947, continued its sluggish growth to 1,158 ships of over 10 million gross tonnage as of January 31, 2013. India is ranked 18th in world ranking and saw a growth of six percent in gross tonnage over the past year.
The income tax levied on Indian seafarers is also borne by Indian shipping companies, which has resulted in a comparative disadvantage to Indian companies vis-à-vis their foreign counterparts.
INSA is also demanding the government grant infrastructure status to the shipping industry. A senior official from Varun Shipping Company told Cargonews Asia, “It would help us secure long-term and cheaper finance.”
Granting infrastructure status would mean reduced cost of borrowings to buy technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher employment and higher foreign exchange earnings/ savings.
Source: CargonewsAsia