The Hindu Business Line : Tonnage tax boosts fleet strength

Strong freight market sentiment and the tonnage tax regime have shored up the fleet strength of the shipping sector, which has a very positive outlook for this fiscal.

INTRODUCTION of the tonnage tax regime from April 2004 and strong freight market sentiments have shored up the strength of India's shipping fleet by an unprecedented 15.4 per cent in 2004-05.

The fleet strength jumped from 639 ships of total 6.94 million GRT to 686 ships of 8.01 million GRT as on March 31. 2005. The fleet further increased to 699 vessels to touch 8.07 million GRT in the last four months — an increase of 1.13 million GRT since the introduction of tonnage tax.

The fleet is expected to grow further, with around Rs 625 crore having been set aside by shipping companies for ship acquisition under the mandatory provision of transfer to the TT reserve. Together with the additional funds that can be leveraged against this by way of bank borrowings, the total commitment for acquisition of ships amounts to about Rs 2,500 crore at the normal mix of 75 per cent debt and 25 per cent equity.

In terms of value addition to the economy, the total incremental GVA (gross value added) from the shipping industry on account of the addition of 1.3 million GRT will result in value addition of Rs 250 crore to the economy.

This is based on a study done by Tata Engineering Research Institute (TERI), which showed that for every addition of one GRT to the national tonnage, the GVA to the economy is Rs 2,211.

India now ranks 19th amongst countries with largest cargo-carrying tonnage in terms of DWT. The outlook for growth of the Indian fleet remains positive and it is expected that India will cross the 10-million-GRT mark shortly, to become one of the top 10 maritime nations.

While 56.6 per cent of the Indian fleet comprises oil tankers, including Very Large Crude Carriers (VLCCs), 29.6 per cent dry bulk carriers, 3 per cent LPG carriers and 1.5 per cent cellular container ships. The average age of the Indian fleet as on date is 17.3 years, as against the world average of 20 years.

There are, however, a few areas that need to be focussed on. For one, the share of Indian ships in the carriage of the country's cargo remains an area of concern. From about 40 per cent in the late 1980s, it has been declining over the years and touched 15 per cent in 2002-03.

While the total volume of India's trade has been increasing at eight to ten per cent every year, the tonnage has not been able to keep pace with it. To restore to the maritime sector its earlier participation level of 40 per cent, India needs national tonnage of 18 million GRT.

The industry is also concerned over certain taxation issues. Just when the industry was celebrating the introduction of tonnage tax, the 2005 Budget imposed new taxes in the form of fringe benefit tax and service tax.

The Indian National Shipowners Association (INSA) feels that expenses incurred on crew travel and stay, which are substantial in the case of shipping companies, and necessary, should be treated as legitimate business expenses and, hence, exempted from FBT. It also feels that shipping be removed from the ambit of service tax.

The industry is, however, upbeat about the outlook in the current fiscal. First, there was an overall increase of 6.7 per cent in world sea-borne trade from 6,133 million tones to 6,542 million tones.

While tanker freight rates registered new highs as a result of a steep rise in world demand for oil, the dry bulk rates were driven by China's appetite for raw materials.

Hence, the outlook for the shipping industry, despite some fluctuations in freight rates, remains positive, INSA feels.

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