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Monday, Mar 04, 2002

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Sinha steers sops transport sector way

P. Manoj

It may be smoother sailing for the shipping industry, powered as it will be by the Budget sops.

WITH A few swift strokes, the Finance Minister, Mr Yaswant Sinha, granted several sops to the transport infrastructure particularly shipping, ports and highways in the 2002-2003 Budget. Prominent among these are to take out shipping companies from the purview of Minimum Alternate Tax (MAT), widening the scope of Section 33 AC of the Income Tax Act to include general reserve and share premium reserve along with paid-up capital while transferring funds to a reserve meant for ship acquisitions. For ports sector, private operators have got a big relief in the15 per cent cut in the Customs duty on specified equipment from the existing 25 per cent to10 per cent.

With private sector showing reluctance to invest in highways, roads and ports in a big way, despite a slew of fiscal concessions already available, Mr Sinha shifted gears to step up private investment in infrastructure facilities through the creation of a Rs 1,000-crore infrastructure equity fund. To be set up through contributions from public sector insurance companies, financial institutions and banks, the fund would be used to provide equity investment for infrastructure projects. It will be managed by Infrastructure Development Finance Company Limited (IDFC).

Mr Sinha also announced the setting up of an institutional mechanism to coordinate the debt financing of large infrastructure projects costing over Rs 250 crore by banks and financial institutions. This will mitigate the problems faced by private investors in achieving financial closure of projects caught in a maze of approvals at various levels. IDBI and ICICI will share the primary responsibility for different sectors in this institutional mechanism while IDFC will be the coordinating institution.

Public-private partnerships on the lines of the annuity system followed in the highways sector will also be encouraged for the creation of infrastructure facilities. This would mean the private sector investing funds in infrastructure development and recovering costs through annuity-like returns from the Government.

The modalities for such private-public partnerships are being worked out by a Task Force. But the biggest beneficiary of Mr Sinha's Budget is the shipping industry, long crying for a status equal to its global counterparts operating in virtual tax-free regimes, paying a tax of 0-2 per cent at the most. In a way, this could well be a watershed event in the annals of Indian shipping industry, remarked an official.

Though, Mr Sinha's Budget pronouncements will benefit such big names in the shipping industry as Great Eastern Shipping Company Limited (GESCO), Shipping Corporation of India (SCI), Essar Shipping Limited and Varun Shipping Limited more given their large paid-up capital base and ability to earn big profits in a highly cyclical industry, smaller entities also stand to gain.

The domestic shipping companies will, henceforth, have more funds for acquiring ships since the scope of Section 33 AC for development rebate allowance has been widened to cover a corpus made up of twice the aggregate of the paid-up capital, general reserves and share premium reserves. Shipping companies can now create a reserve fund equivalent to twice the aggregate of the amounts of paid-up capital, general reserves and share premium reserves without paying any tax. This fund should be used for the sole purpose of ship acquisitions within a period of eight years.

The merit of the scheme lies in the fact that it is linked to tonnage acquisition. Because, if the amount set aside in the reserve fund is not used for acquiring ships within the stipulated period, it would be taxed as per the prevailing corporate tax rates. Shipping companies would also have to pay tax if the reserve fund thus created exceeds twice the aggregate of the paid-up share capital, general reserves and share premium reserves. Shipping companies were allowed to build up a reserve fund equivalent to twice the paid-up capital to get tax benefits available under section 33 AC. However, the existing reserve fund limit is considered insignificant in view of the huge amounts required for buying ships.

Further, MAT created problems for the shipping companies while transferring monies to the reserve fund. Even if shipping companies made profits in a year, MAT took away a certain portion of the book profits.

This limited the quantum of funds that could be transferred to the reserve fund. Section 33 AC was, thus, a non-starter so long as MAT was in vogue.

"Because of these anomalies, shipping companies were not able to save enough money to put in the reserve fund created under Section 33 AC," says Mr B. L. Mehta, Varun Shipping's veteran in the shipping industry.

According to Mr Mehta, the steps announced by the Finance Minister will enable shipping companies to save more money for investments in tonnage acquisition. This will put both small and large shipping companies on an even keel.

The inclusion of share premium reserves and general reserves also under the ambit of Section 33 AC and the withdrawal of MAT will enhance the total amount available to shipping companies for ship acquisitions.

"The taxable income of shipping companies will thus stand reduced considerably, effectively making them pay very low level of tax or virtually no tax at all," says Mr Rajiv Agarwal, Executive Director, Essar Shipping.

Consequently, Indian shipping companies would have more funds at their disposal to fund acquisitions, ensuring that they are encouraged to go in for Indian flag vessels thereby improving the national tonnage.

As one senior SCI official said: "Thus with one decision, Mr Sinha has achieved two purposes. Nobody in the industry dreamt that such a thing would come about."

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