The Hindu Business Line : Payback time

A GOVERNMENT-APPOINTED committee is studying a complaint by Indian shipping companies that the combined impact of a dozen different taxes is not only weakening them but also blunting their competitive edge in the international market. It was precisely to lighten the tax burden that the government introduced tonnage tax last fiscal, giving domestic ship-owners the option to pay what was termed a `fair tax for shipping', which their western counterparts enjoy. By the industry's own admission, adoption of tonnage tax — assessed on the basis of assets owned and operated by a company instead of earnings, as under corporate tax — has reduced shipping companies' tax outflow to below three per cent of their profits. Obviously, such a level is significantly lower than the normal corporate tax rate of 33 per cent and the average effective tax rate of 10-12 per cent paid by companies that enjoyed exemption under Section 33 AC of the Income-Tax Act.

Thanks to the booming freight market, shipping companies' fortunes have turned around, with earnings soaring for past three years. The sustained demand for ships — fuelled mainly by increasing industrial activity in major Asian economies — has outstripped supply, restricted by limited yard capacity and demolition of aged tonnage. In such cushy market conditions, tonnage tax bolstered the shipping companies' bottomlines to levels never seen before. Despite freight rates easing up the last quarter, it will be smooth sailing for shipping lines for two to three more years, going by expert forecasts. Admittedly, Indian shipping lines are subject to a plethora of other taxes, such as service tax, fringe benefit tax, sales tax (VAT), withholding tax and Customs duty. But this is so for companies in other sectors too. The shipping sector claims that, in addition to tonnage tax, domestic lines will be collectively paying over Rs 300 crore in different taxes this year. While this number may or may not be accurate, there is no denying the genuine problems dogging the industry.

The shortage of marine officers is a perennial problem. Income-tax exemption for seafarers has been sought as shipowners believe officers leave to take up foreign jobs mainly because of the heavy tax cut on their Indian pay. Almost all large operators are finding it difficult to maintain the statutory manning strength on board. The situation is so worrying that Indian lines are asking permission to employ foreign crew, at least on a temporary basis. Though this may not be a sound move politically, if sectors such as airlines and hotels can employ foreign nationals, ship-owners too must have similar freedom.

If taxes are a burden, Indian companies do enjoy certain benefits such as cargo support, reservation of coastal cargo and the advantage of growing home trade. Indian operators have also been exploring the option to flag out. Some have gone for asset-stripping by taking advantage of the buoyant market for second-hand ships. Most Indian companies are sitting on huge cash reserves, which they are unable to invest in acquiring additional tonnage because shipyards are booked to full capacity for next two years and second-hand ship prices are very high. On balance, it is payback time for shipping lines. Taxes are always a burden, but cannot be wished away.

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