The Hindu Business Line : Rumblings in shipping sector over tonnage tax clause

WHILE the Indian shipping industry is euphoric over the introduction of the long-proposed tonnage tax regime in the Union Budget, a section of the industry appears a trifle unhappy over the clause that makes it mandatory for all shipping companies under the new tax structure to plough back a minimum of 20 per cent of their book profit to acquire ships.

Barely a week after the presentation of the Budget, rumblings can be heard in the industry over this clause, though a dominant section within the industry finds nothing wrong with it.

While this section said that after all the cardinal objective of a tonnage tax regime is to facilitate a steady increase in Indian shipping tonnage, the other section is of the view that the `plough-back' clause should be obligatory instead of being mandatory.

As per the clause, all tonnage tax companies should credit an amount not less than 20 per cent of their book profit every year towards a reserve account, which should be used for acquisition of ships within a period of eight years.

As a matter of fact, this was one of the recommendations of the Rakesh Mohan Committee report, which actually formed the basis for shaping the draft proposal for introduction of tonnage tax.

Analysts have estimated that with this plough-back clause, the country's shipping tonnage may dip within the first six years from about seven million GRT (gross registered tonnage) in 2004 to 6.20 million GRT by 2010, as there would be substantial tonnage deletion given the current age profile of ships.

But as the clause makes it mandatory for utilisation of the ship acquisition reserve account within a period of eight years, the tonnage is likely to increase from 6.20 million GRT in 2010 to 7.03 million GRT by 2020, 7.42 million GRT by 2023 and 8.03 million GRT by 2027.

This estimation has been worked out on the assumption of the Rakesh Mohan Committee that companies would utilise the funds in their reserve account to the extent of 30 per cent of the cost of the vessel, while leveraging the remaining 70 per cent from the market.

It is clear from these estimates that the tonnage likely to be added between 2004 and 2027 from the reserve account under tonnage tax alone would be about 1.03 million GRT.

On the other hand, continuation of the corporate tax regime would have resulted in the tonnage falling from seven million GRT to 4.82 million GRT during this same period, according to analysts.

Thus, notwithstanding the unhappiness expressed by a section of the industry, the dominant view, in this context, is that the `plough-back' clause is essential from the standpoint of the country's shipping interest. This view is bolstered by the fact that all countries that implemented tonnage tax benefited from a sharp increase in their respective tonnages.

For example, in the UK in 2001, 47 companies opted for a tonnage tax regime and 598 ships got added to the fleet. Similarly, in Norway, 5.5 million GRT (229 ships) was added between 1996-98, while in the Netherlands, within two years of introducing the tax 1.1 million GRT (142 ships) was added.

In Germany, the tonnage tax regime had a stabilising effect on its shipping industry, with a 2.1 million GRT increase in 2001.