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Amit Mitra

Mumbai Sept. 5 Shipping companies will now have to wait till November for the final hearing on the tax deducted at source (TDS) issue before the Supreme Court, which was slated to give out its final judgment on September 3, 2008.

Industry sources said the Supreme Court put off the matter till the first week of November, after representatives of the Government sought additional time to put forth its arguments on the TDS issue.

Following an amendment to the Taxation Laws (Amendment) Act in July 2006, the income-tax department had been demanding that shipping companies would have to pay a 20 per cent TDS on their earnings from freight and charter operations for 2006-07.

In 2007-08, the department, after persistent pleas from shipping companies, whittled down the tax rate to 10 per cent, which was still higher than the two per cent TDS, these companies had been paying.

With the annual earnings of the shipping industry placed in the region of Rs 10,000 crore-12,000 crore, a 20 per cent TDS could translate to about Rs 2,000 crore, as compared to the tax outflow of about Rs 200 crore before the amendment. The increase in TDS rates will not, however, 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 charges up-front. The amount is duly returned to the companies after their assessibility of tax, which would be based on a much lower tonnage tax.

Prior to the July 2006 amendment, shipping companies had been paying TDS according to the provisions of Section 194C of the Act.

As this categorised freight operations as ‘carriage of goods and passengers by any mode of transport other than by railways’, shipping companies paid a TDS of two per cent plus surcharge.

After the amendment, the tax authorities took the line that hiring of ships fell under the category of rent, for which the prescribed rate of TDS is 20 per cent plus surcharge.

And as it was tax deducted at source, the onus to collect the tax from the shipping companies was on those who chartered the ships, such as oil and steel companies.

“Simply put, when, say, 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 (subsequently 10 per cent) TDS from the total freight bill and hand it to the I-T department,” an industry source said.

The shipping industry has been insisting that “terming charter hire as rent and taxing at the rate of 20 per cent at source would erode the cash flows to a very great extent and negate the benefits of tonnage tax.”

More Stories on : Shipping/Ports | Taxation | Courts/Legal Issues

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