The Hindu Business Line : Tonnage tax: Clouded in uncertainty

FRESH clouds of uncertainty appear to have gathered over the proposed introduction of a tonnage tax regime for the Indian shipping industry in the wake of the political changes that are unfolding in New Delhi.

The shipping industry, which had been seeking introduction of this tax regime in place of the existing corporate tax structure for a long time, had come close to achieving success in its efforts when the proposal was introduced in the interim Budget of the former Finance Minister, Mr Jaswant Singh. Indeed, it had taken the industry years to convince the former NDA Government about the long-term economic advantages that the country could derive by boosting the shipping sector through introduction of tonnage tax — it had even instituted an independent study by the Tata Energy Research Institute (TERI) to bring out a comprehensive report on the subject.

"We had come close to achieving this, with the Finance Ministry under the NDA Government also being convinced about the need to have such a tax structure. But now with a change of guard at the Centre, we may have to start all over again to push through the proposal. It will certainly mean fresh delay, which will, of course, depend on the economic stand that the new Government will take. But we are still hopeful of getting it through, as a lot of groundwork has already gone into it," a representative of the shipping industry told Business Line.

The Indian shipping companies are at present subject to a corporate tax of 35 per cent. However, the effective rate of taxation during the last few years worked out to be about 22 per cent— it was only since 2002-03 that the industry got some benefits under the Section 33 AC of Income Tax Act, which brought down the effective taxation rate to 7.5 per cent.

"Even this is among the highest in the global shipping industry, with about 94 per cent of the world shipping tonnage is under a very low tax regime," according to an industry analysts.

It was against this background that the industry had been seeking Tonnage Tax on the lines of the UK Tonnage Tax Act, under which a shipping company's liability is determined by the tonnage of its fleet rather than profit generated by its commercial operations. The modified tonnage tax proposal for the Indian industry envisages calculation of the tax by multiplying the net registered tonnage (NRT) of the vessel with the prescribed rate to compute a notional daily taxable income. This value is then multiplied by the prevailing corporate tax rate and the number of days the ships operate in a year. Under this scheme, the tax would be about 2-3 per cent lower than the prevailing rate of 7.5 per cent.

Even the Rakesh Mohan Committee that had gone into the subject had recommended that "the Government must recognise the vital role of shipping in the national economy and a tonnage tax scheme should be devised so that Indian shipping becomes internationally competitive."

As the proposed tax regime will have significant revenue implications, industry analysts feel that it would take a longer time to convince the new Government. "It all depends on how the new Shipping Minister pursues the matter with the Finance Ministry," an analyst said. The change in Government has also put a question mark on the implementation of the Rs 1,00,000 crore Sagar Mala programme, which was the pet project of the former Prime Minister, Mr Atal Bihari Vajpayee.

"The Congress had never been much enthused by the project, which it felt was difficult to implement. And with the project linked to Mr Vajpayee (he announced the project in the last Independence Day speech), there are chances that the new Government may drastically alter the scope of the project, if not totally drop it," according to the analyst.

The project, which encompasses all facets of the maritime sector, including ports, shipping, shipbuilding, inland waterways and maritime education, was to be implemented over 10 years through active private participation.