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Friday, Mar 01, 2002

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Budget to encourage growth in shipping

R. L. Pai

IN HIS opening remarks the Finance Minister stated that this Budget was a progression into the second generation of economic reforms. However, there appears to be limited incentives towards accelerating economic growth. The tinkering with tax rates may send negative signals to committed long-term foreign investors and institutions.

Several of the proposals will impact the shipping industry, but there is some disappointment that tonnage tax has not been considered. The major concession is with respect to the Section 33AC provision. Earlier, up to twice the company's paid-up capital was the limit to which the 33AC reserve could be built up. With the new proposal, the paid-up capital will now include the share premium reserve and the general reserve. Several shipping companies that ran out of capacity for the creation of the 33AC reserve will now benefit from this amendment.

The second major concession refers to the computation of the minimum alternate tax (MAT). The amount to be set aside for the 33AC reserve in a particular assessment year will now qualify as a deduction in the MAT computation. The combination of these two proposals will allow shipping companies to retain a larger proportion of their profits to finance future growth.

There is also a proposal to allow additional depreciation of 15 per cent on new plant and machinery. The acquisition of new ships should also qualify for this proposal. The additional 15 per cent provision is equivalent to the investment allowance provision that was earlier available and provides a higher tax shield over the asset's life cycle. This will not apply to the acquisition of second-hand ships.

Further steps have been announced for capital account convertibility. Companies will now be free to invest up to $100 million (up from $50 million) per year overseas through the automatic route. This may encourage Indian shipping companies to consider the acquisition of ships under foreign flags to improve returns on investment through lower taxation. Such ships could then be taken back on bareboat charter and operated by the Indian holding company. This may not be a positive trend for the growth of national flag shipping, but will provide an alternate route for shipping investment by Indian interests.

The industry had sought tax exemptions for seafarers serving on Indian flagships. This relief has not been granted. In fact, the new personal income tax proposals will impose a further burden on seafarers that will have an adverse impact on retaining skilled manpower in the Indian fleet.

There was a clear policy announcement on the phased corporatisation of 17 major ports. This will, in time, improve the productivity of Indian ports and generally improve the commercial utilisation and profitability of the shipping industry. New concessions for infrastructure investments have also been announced. This will be beneficial to the port sector and may encourage increased private sector participation.

The expected announcement on the dismantling of the APM with effect from April 1 will have a major impact on the oil industry0.

The subsidies on LPG and kerosene have been reduced and petroleum product prices will be linked to the international market from April 1. With the winding up of the oil pool account, subsidies to the petroleum sector will now be directly met out of indirect taxes and budgetary provisions. The deployment of Indian flagships in the oil trade will be increasingly driven by international market forces.

The Budget has been welcomed by the shipping industry and will revive growth. It will have a positive impact on the market valuation of the PSUs slated for disinvestment or corporatisation in the near future. However, the incentives for attracting FDI are limited.

(The author is Director and Vice-President, Indian National Shipowners Association.)

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