The Hindu Business Line : Problems a tonne in tonnage tax

THE optional tonnage tax regime proposed to be ushered in by the Finance (No. 2) Bill, 2004 for shipping companies is biased in favour of big shippers on more than one count.

The proposed tonnage tax regime turns this logic on its head by seeking to cosset the bigger ones if not clobber the smaller ones. For, the daily presumptive profit from a ship on tonnage up to 1,000 is Rs 46 for each 100 tonnes, with the next 10,000 tonnes being presumed to have earned a profit of only Rs 35 per each 100 tonnes, and so on. Giant ships walk away with the cake with capacity in excess of 25,000 giving rise to a presumptive profit of only Rs 19 per 100 tonnes. This seems to be an inverted and perverted logic.

The proposed move flies in the face of this logic. Or is it an incentive for discarding small ships and going in for huge ones? Or does the proposed regime take an apocalyptic view of operating big ships and assume gross under-utilisation of capacity that inevitably would leave huge fixed costs unabsorbed? One feels that the presumptive taxation scheme for shippers could have taken a leaf out of the one obtaining for small contractors — 8 per cent of the contract price is presumed to be the profit.

This provides a level-playing field for big and small ships, besides leaving the issue of number of days (discussed hereinafter) a ship was used irrelevant. Indeed percentage of turnover is the best form of presumptive taxation as it obviates the need for periodic revision, upward or downward, in the presumptive profit figures. That ad valorem duty has almost become the norm in indirect taxation is a testimony, if one were needed, of the virtues of percentage based presumptive profits.

When the freight rates are revised upwards consequent on turnaround in the global fortunes of shipping companies, the exchequer would automatically get its share of the good fortunes of the shipping industry and vice-versa when things turn sour. But this presumes adoption of percentage based presumptive profit.

The daily presumptive profit is required to be multiplied by the number of days in the previous year — normally 365 days. But it seems companies would plump for the second alternative multiple — number of days operated during the year.

In the event, the first alternative multiple would remain a dead letter. Not only that, this would introduce avoidable complications when the avowed aim of a presumptive taxation scheme is to make things simple. There may be quibbling over the number of days a ship was actually put to use.

Lastly, is not freight rate a function of both the distance and weight? By being obsessed with weight alone and being oblivious of the role of distance, the regime once again plays favourites — long hauls would be pampered. It may be contended that the distance element gets subsumed in the time factor which has been considered by the proposed new regime — a long-haul would involve a greater number of days and, hence, attract a higher multiple. But this is a weak alibi. A regime, especially fiscal, must be transparent.

The formula for presumptive profit should transparently factor in both the time and weight factor. As it is the presumed profit of Rs 46 per each hundred tonne on the first 1,000 tonnes of capacity would most certainly prompt a wag to ask the question:

Would the profit be the same whether you take, for example, an oil tanker from Saudi Arabia to India or to the US? Profit per tonne-mile or tonne-kilometre or tonne-nautical mile if you like would have been a better, more appropriate and fairer fit.

(The author is a Delhi-based chartered accountant.)