The Hindu Business Line : Budget 2004-05: Taxing times ahead for transport sector?

The introduction of service tax in the shipping sector would turn out to be an irony for the shipowners. The Government would do well to look at the nuances of each transport sector before introducing service tax.

THE entire transport sector is jittery. The grapevine is abuzz that the Finance Minister, Mr P. Chidambaram, is contemplating clamping a service tax on road transport, railway freight as well as shipping in the coming Budget to augment government revenues.

The plan, which is "neither confirmed nor denied" by the Finance Ministry, has sent the transport sector into a tizzy. "If the service tax comes, it is going to be a big damper and will cast a heavy burden on the shipowners," a shipping industry official said.

Drawing a parallel with a Shakespeare play, he said the introduction of service tax on shipping sector would turn out to be an irony for the shipowners.

"When we ask for tonnage tax, we are faced with the possibility of service tax being imposed on us. And, when we ask for Customs duty exemption on bunkers, spare-parts and consumables for coastal shipping, the Government is contemplating on imposing Customs duty on the import of ships. This is an ironical situation," he remarked.

According to shipowners, the Government would do well to look at the nuances of each transport sector before introducing service tax on the shipping industry. "Road and railways sectors do not have direct competition from abroad.

Since chartering of foreign flag vessels by Indian charterers is permitted, the domestic shipping industry faces direct competition from foreign shipowners for moving cargo into the country," he said.

Shipping is a global industry, but service tax on shipping is un-heard of globally, he said, adding that the apex body of domestic shipowners, the Indian National Shipowners Association (INSA), was thinking of appointing an international expert to study the issue from a global perspective.

Arguing against bringing shipping under the service tax net, the official said that an announcement in this regard in the Budget runs the risk of Indian charterers/importers opting for the cost, insurance and freight (c.i.f) contracts instead of the free-on-board (f.o.b) contracts to obviate the burden of extra costs much to the detriment of Indian shipping.

Under f.o.b deals, shipping arrangements have to be made by the Indian charterer/importer whereas under c.i.f contracts, the onus is upon the seller/exporter.

"Indian owners would not be able to absorb the extra costs arising out of service tax and have to pass it on to the charterers, jacking up the freight rates considerably. And, if the Government raises the rate of service tax from 8-12 per cent, as is widely speculated, then the down side will be huge for the shipping industry," a shipowner said.

The possible introduction of service tax also drove the road transport sector to meet the Revenue Secretary on June 16. According to a National Council of Applied Economic Research (NCAER) study, with a turnover of around Rs 1,60,000 crore, the road transport sector could yield a service tax revenue of Rs 12,800 crore annually at the prevailing rate of 8 per cent.

In the case of transport companies and truck operators, history is repeating itself. Because, it was Mr Chidambaram, who as the Finance Minister in the United Front Government, had introduced service tax on the road transport sector by his 1997-98 Budget.

Following a nation-wide protest from the transporters and truck operators, the All India Motor Transport Congress (AIMTC) had signed an agreement with the then Revenue Secretary, Mr N. K. Singh, on April 9, 1997 which exempted the road transport sector from the purview of service tax.

"If service tax is re-introduced for the road transport sector, 1997 will be repeated. How can the Government go back on the April 1997 agreement?" Mr J. M. Saxena of AIMTC told Business Line.

Unlike shipping and railways, road transport operators do not have a fixed place of call. There are inherent difficulties in levying service tax on the road transport sector. "Besides, we are already over-burdened and will not be in a position to meet the additional costs," Mr Saxena stated.

The export-import (EXIM) trade feels that a service tax on railway freight would hike their over-all transaction costs, affecting the competitiveness of the Indian industry. "Both Indian Railways and Concor, which haul containers by rail, would not be in a position to absorb the service tax liability and would pass on the burden to the trade," a trade source said.

While the Railway Ministry is widely believed to raise the freight rates by 2-3 per cent in the coming Railway Budget, the overall increase in freight charges would be substantial if the service tax is also introduced. "Effectively, on the whole, the freight increase would become much higher for the trade to countenance," the source said.

The NCAER study shows that the Government could mop up Rs 2,200 crore annually through a service tax on railway freight.