The Hindu Business Line : Deferred tax liability of Rs 380 cr written back — Tax regime change boosts shipping cos' profits

THE balance sheets of Indian shipping companies acquired a new sheen at the end of 2004-05, the first year of implementation of the tonnage tax regime that replaced the earlier corporate tax.

With the TT regime significantly watering down the tax burden on ship owners, the companies, in fact, reported a higher profit after tax than profit before tax.

Apart from drastically bringing down the overall tax burden, the TT regime gave shipping companies another advantage of not having to provide for any deferred tax liability, which had to be created under the earlier tax regime.

This enabled shipping companies to write back the deferred tax liability, which further shored up their net profits.

The four leading players in the industry— Shipping Corporation of India, Great Eastern Shipping, Mercator and Essar Shipping— wrote back a combined deferred tax liability of about Rs 379 crore during the year.

In other words, their combined net profits reflected an increase of Rs 379 crore on this account only.

While SCI wrote back Rs 295.48 crore, Essar Shipping, GE Shipping and Mercator wrote back Rs 30.58 crore, Rs. 47.38 crore and Rs 4,84 crore respectively.

The amounts correspondingly added to their respective net profits.

As per the accounting standards, deferred tax is the tax effect of timing differences. Timing differences are actually the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

In fact, timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items are included or considered in arriving at accounting income.

Unabsorbed depreciation and carry forward of losses, which can be set off against future taxable income, are also considered as timing differences and result in deferred tax assets.

With the TT being a tax on presumptive income, shipping companies do not have to show the deferred tax liability on their balance sheets.

"This is a happy situation when most of us (shipping companies) reported a higher PAT than PBT," a senior official of a private shipping company pointed out.

For example, SCI's PBT for the last fiscal was Rs 1,147.19 crore, while its PAT was Rs 1,419.91 crore — this was after the company wrote back a deferred tax of Rs 295.48 crore, while making a provision for taxation of Rs 22.76 crore (as against Rs 24.01 crore in the previous fiscal).

Similarly, GE Shipping's PAT of Rs 816.36 crore was higher than its PBT of Rs 791.18 crore during the year.

The TT regime brought down the tax burden on shipping companies, from 33 per cent under the earlier corporate tax regime, to a bare three per cent.

"Overall, the shipping companies reported a very low incidence of tax as it is now on presumptive income, coupled with the fact that last fiscal saw very high freight rates in all categories of cargoes," a shipping analyst pointed out.

TT is calculated on notional profit payable at the standard prevailing corporate tax rate. As per the notional profit structure, it is Rs 40 per 100 NRT (Net Registered Tonnage) for ships up to 1,000 NRT, Rs 30 for ships between 1,000 and 2,000 NRT, Rs 25 for ships between 10,000 and 25,000 NRT and Rs 15 for 25,000 NRT ships and above.

NRT is the internal capacity of a vessel measured in units of 100 cubic feet less the space not available for carrying passengers or freight.

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