The Hindu Business Line : Thanks a tonne!

THE Finance Minister, in the run-up to the elections, announced in his Interim Budget his Government's intention to usher in a regime of tonnage tax for the shipping industry. Tonnage tax is an example of presumptive taxation. In a presumptive taxation scheme, the tax is not on actual profits but on the notional profits based on certain parameters.

This is not the first time the Government has veered round to the advantages of the presumptive taxation scheme, though it is yet to use it on a wider scale across industries. As it is, it is being used to bring into the tax net, the hard-to-tax incomes. For example, under Section 44AD, taxable profit from civil construction contracts is deemed to be 8 per cent of the gross receipts if the total receipts during the year do not exceed Rs 40 lakh. Similarly, in terms of Section 44AF, where a retailer's turnover does not exceed Rs 40 lakh, 5 per cent of his turnover is deemed to be his taxable profits. In all these cases, right of rebuttal is given. For availing this right, one has to maintain accounts and get them audited in the manner prescribed by Section 44AB.

One does not know what the contours of the tonnage tax scheme for shipping industry would be eventually. But the shipping industry already gets sizeable tax benefits under Section 33AC. Till the assessment year 2005-2006, the entire profit from shipping business of an Indian company is tax-free if it is transferred to a reserve for acquisition of ships. Thereafter, 50 per cent of profits would be so exempt. The only problem is, this exemption is not available the moment the amount transferred to such a reserve exceeds twice the aggregate of paid-up share capital, the general reserves and the share premium account.

To overcome this limitation, shipping companies perforce have to keep on topping their share capital so that there is no overflow in the reserve going down the drain.

The moot question, however, is whether tonnage tax will be better than the existing dispensation. If a shipping company plumps for it, it would obviously lose the benefit under Section 33AC.

The enthusiasm with which the shipping industry has greeted the proposal shows that it is uncomfortable with the existing regime for the following two reasons:

Topping up of capital from time to time; and

Acquisition of a new ship within eight years following the previous year in which the amount was transferred to reserve.

Failure to acquire the ship and hold on to it for three years results in tax being payable on profit exempted earlier. Shipping industry suffers from cyclical vicissitudes and perhaps it finds it difficult to acquire a ship every now and then.

There is, therefore, bound to be a nagging fear of under-utilisation of capacity. That the new ship can be disposed of after three years need not necessarily mitigate the problem because the realisations from sale are not going to be anywhere near the acquisition price less depreciation.

This most certainly would result in a sizeable loss. There is no point in saving tax only to fritter it away in the form of loss on sale of the new ship. Perhaps, what has endeared the shipping industry to the tonnage tax regime is the freedom from burdensome conditionalities, especially the one entailing acquisition of a white elephant, accompanying the extant regime.

Acquisition and disposal of a ship is not as simple as loading and unloading operations.

The alacrity with which the industry seems to have lapped up the proposal shows that when the choice is between a reasonable tax, on the one hand, and full exemption subject to burdensome conditionalities, on the other, a businessman is bound to plump for the former.