The Hindu Business Line : Stiff tax regime forces shipowners to flag out vessels

Alternatives
Companies are eyeing other options such as opening of a second registry or registering their ships in the tax-free special economic zones.
Indian fleet, which has an average age of 17.9 years, needs to be replaced within five years.

Mumbai , Sept. 28

The trend of Indian shipowners flagging out their vessels from India to other countries to buck the stiff domestic tax regime is likely to increase in the coming months if the Government did not seriously address the tax issues. Already, domestic shipping companies have begun to partially flag out their vessels, especially some of their new acquisitions, because of the domestic tax structure.

Mr Yudhisthir Khatau, Chairman of the Indian National Shipowners Association (INSA), said the Shipping Ministry would shortly take up the issue of shipowners flagging out their vessels with the Finance Ministry. "The Shipping Ministry has understood our plea that Indian shipping industry should have a level playing field with its global competitors, who operate under a zero-tax regime. The Ministry will take up the issue (of waiver of most of the 12 taxes that shipping companies are currently paying) with the Finance Ministry soon," he told presspersons, after the INSA annual meeting here.

Other options

Mr Khatau said shipping companies were also mulling other options such as opening of a second registry or registering their ships in the tax-free special economic zones (SEZs). "We are aware that rules and regulations governing SEZs are not very clear at this moment. We are also aware of the limitation that SEZs can only register new assets and not the tonnage we are at present owning. But this could be a way out," he pointed out.

He said the 12 taxes, including service tax, lease tax and withholding tax on in-chartering payments, fetched the Government about Rs 300 crore annually. "But the issue is not what the Government will lose if it were to waive the taxes. The issue is what it would gain in the form of new assets, reduction in export-import costs and contribution to the economy. It has to be understood that shipping industry operates in a truly global environment," he said.

It was due to the flagging out of some vessels that growth in Indian tonnage dropped from 15 per cent to 5.6 per cent last fiscal, as some of the new acquisition and existing ships were flagged out. The Indian fleet grew from 8.01 million GT as on March 2005 to 8.46 million GT by the end of 2005-06.

Indian fleet

Mr Khatau said about 50 per cent of the Indian fleet, which has an average age of 17.9 years, needed to be replaced within five years. "The industry may have to spend $ 3-4 billion during the next five to seven years for replacing the aged fleet alone," he said, adding that about Rs 1,300 crore has been set aside by the industry in tonnage tax reserve, as per the mandatory requirement, in the last two years. "If this amount is leveraged for bank borrowings, the total commitment for acquisitions amounts to about Rs 5,200 crore," he added.

However, notwithstanding the growth of Indian fleet, the average share of Indian vessels in shipping India's overseas trade has been steadily declining over the years, touching 13.7 per cent in 2004-05 against 13.8 per cent in the previous fiscal.