The Hindu Business Line : Tonnage tax blues

THE EUPHORIA OVER the tonnage tax, it appears, is over. The fineprint of the Budget proposals reveals some disparities, perhaps unintended, between what the shipping industry had wanted and what it got. The industry's disappointment is understandable as, after all, the proposal was framed at the behest of the industry and so it would have had every reason to think the new measure would mirror completely its perspective on the issue.

A case in point is the issue of computation of 51 per cent of the net registered tonnage of a shipping company to be eligible for assessment under a tonnage tax regime. The industry would perhaps like some latitude in the computation of this number when a company is plying some foreign flag carrying vessels on charter for varying durations with a few of its own. It may be a while before it is able to opt out of some of the charter commitments it may have entered into and hence cannot avail itself of a liberal tax regime straight away. On the other hand, the Government too may have a point in holding that such a regime should be available to an assessee only if revenues accrued from assets that were predominantly Indian and, hence, the requirement of averaging percentages of Indian ownership of the fleet over the entire year. The Government may perhaps consider allowing some marginal relief against clearly laid down targets of fleet acquisition or at least permit the industry to opt for tonnage tax in proportion to the size of the domestic fleet. Alternatively, the industry may be allowed the freedom to decide an extended period instead of having to do so before December end. The withdrawal of the benefit of sheltering a portion of the profits against creation of a reserve for acquisition of new ships is bound to hit hard the state-owned Dredging Corporation of India, which even as it is ineligible for assessment under the proposed tax regime will be denied the benefits it had enjoyed thus far.

A section of shipowners is not at all happy with the way it has been made mandatory for all shipping companies to plough back a minimum 20 per cent of their book profits to fund vessel acquisitions. The plough-back stipulation is really not warranted. If shipping companies are driven by a commitment to grow and the new regime (tonnage tax) would leave more funds in their hands then it follows that they would plough back the requisite sums of money without the tax laws having to mandate it. What such stipulations do is to put them in a straitjacket on their dividend and capital expenditure plans — something best left to the companies themselves. There can be no doubt that the proposed tonnage tax will be by and large beneficial to the shipping industry. In fact, it is win-win for both the Government and the industry. The Government is assured of a steady tax revenue irrespective of whether the shipping line concerned is earning profits or not. The industry, on the other hand, stands to gain from low tax rates. Only companies confident of not making profits for the next 10 years will be wary of opting for the proposed regime. But, then, in the present shipping market it is not easy to incur losses.