The Hindu Business Line : Higher TDS may squeeze shipping cos' cash flow

Hike impact
Proposed 20% may work out to a huge Rs 20,000 cr tax.
Last fiscal, industry paid only Rs 109 crore.
Cos urge Centre to drop the proposal.

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Mumbai Feb. 23 Indian shipping companies may face a squeeze on its cash flows by the end of this fiscal as they face the prospect of shelling out a higher TDS (Tax Deducted at Source) of 20 per cent, as against the present two per cent, on their earnings from freight and charter operations.

With earnings of the shipping industry placed in the region of Rs 10,000-12,000 crore annually, the outflow on the proposed 20 per cent TDS could come to about Rs 2,000 crore this fiscal. Considering that the industry paid a total tax of only about Rs 109 crore (including Rs 20 crore towards Tonnage Tax) last fiscal, the steep hike in TDS is threatening to take a toll on its immediate cash flows.

The 20 per cent TDS will not have an impact on the balance sheet of the companies in the long run, as the ship owners, who are at present under the Tonnage Tax regime, can get the refund. But this will take time and hence their immediate cash flows would be tightened.

Tax pundits say that TDS is only a calculation by which the tax authorities collect the chargers up-front. After assessment, the amount is duly returned to the companies after their assessibility of tax, which would be based on a much lower TT.

What is worrying shipping companies is that as shipping is a capital-intensive business, they may lose a bit of their competitive edge in the immediate term due to cash flow restrictions.

`Drop the proposal'

The Indian National Shipowners Association has shot out letters to the Shipping and Finance Ministries to drop the TDS proposal. But so far, with less than 35 days left for the fiscal to end, neither the Finance Ministry nor the I-T department has reacted positively, shipping company officials said.

It all started in July 13, 2006 when the government amended Section 194-I of the Income Tax Act, categorising ships as plant & machinery to enable the I-T department to slap a higher TDS on shipping companies.

After the amendment, the I-T authorities took the view that hiring of ships to earn freight will now fall under the definition of `rent'. The authorities have chosen to term the usual charter hire as `rent', to impose the prescribed rate of TDS rate of 20 per cent plus surcharge. The I-T department has also sent notices to shipping companies for payment of the new levy effective July 13, 2006.

"At present, under the Tonnage Tax regime, the prevailing practice of deducting TDS under Section 194 C involves a TDS rate of 2 per cent. Terming charter hire as rent and taxing at the rate of 20 per cent at source would erode cash flows of the industry," an INSA memorandum pointed out.

Shipping companies will find it hard to wriggle out of the TDS net, as the tax will be deducted at source. In other words, the onus to collect the tax from the shipping companies will be on those who charter the ships, like oil and steel companies.

"Simply put, when the Indian Oil Corporation charters a ship from an Indian shipping company to haul a parcel of crude, the oil company will have to deduct the 20 per cent TDS from the total freight bill and hand it to the I-T department," an industry source said.

Likewise, when a shipping company charters a ship from another ship owner, the company will have to deduct the 20 per cent tax from the charter rate.

The industry has pleaded that time charter and voyage charter should fall under the provisions of Section 194-C of the Act and not under the amended Section 194-I — Section 194-C describes shipping operations as `carriage of goods' and not as rent as the amended Section 194-I implies.

The shipping industry feels the move will negate the benefits of the Tonnage Tax regime. It has argued the industry is taxed heavily as compared to its counterparts the world over. The 2005 Budget introduced fresh taxes like service tax and Fringe Benefit Tax, even while shipping companies were already paying ten different taxes, an industry representative said.

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