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Saturday, Nov 23, 2002

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Cabinet security panel favours tonnage tax

P. Manoj

The panel had suggested the notional income schedule method for calculating tonnage tax.

NEW DELHI, Nov. 22

NATIONAL security considerations have come to the rescue of the sinking domestic shipping industry on securing a new tonnage tax regime which will act as an alternative to the existing corporate tax structure and help strengthen Indian tonnage.

The Cabinet Committee on Security (CCS) headed by the Prime Minister, Mr Atal Bihari Vajpayee, ``favoured'' the tonnage tax proposal after detailed discussions during a meeting held here on Thursday.

The domestic shipping industry is currently subjected to the normal corporate tax, which is as high as 30 per cent. A tonnage tax system would imply that shipping companies would be taxed on the basis of their net registered tonnage (NRT) worked out on the notional profit method with applicable corporate tax rates.

The Deputy Prime Minister, Mr L.K. Advani, and the Shipping Minister, Mr V.P. Goyal, also attended the meeting. But, the Finance Minister, Mr Jaswant Singh, was unable to participate in the meeting since his presence was required in the Lok Sabha where the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002 was taken up for consideration.

``With CCS favouring the proposal, the Finance and Shipping Ministries would now discuss and work out the finer details of the tonnage tax with the aim of announcing it in the next Union Budget '', a senior Shipping Ministry official said.

The new tax regime for Indian shipping industry will be based on the recommendations made by a committee headed by Dr Rakesh Mohan, former Advisor to the then Finance Minister, Mr Yashwant Sinha.

The panel had suggested the notional income schedule method for calculating tonnage tax.

It had recommended a notional income schedule of Rs 40 per day per NRT for up to 1,000 NRT, Rs 30 per day between 1,000 and 10,000, Rs 25 per day between 10,000 and 25,000 and Rs 15 per day for NRT of 25,000 and above.

On the notional income thus worked out, the existing corporate tax rate would be applied to achieve the end result of a very low level of taxation for Indian shipping.

The panel had further suggested that shipping companies should be given a window period of 2 years to opt for the tonnage tax scheme after it comes into force. Besides, it had recommended a minimum lock-in period of 10 years once a shipping company opts for the new system of taxation.

Once, the tonnage tax system is opted by the shipping companies, a minimum of 20 per cent of the book profits computed as per the Companies Act should be credited to a separate reserve account to be utilised only for ship acquisitions within eight years.

Shipping companies would have the freedom to opt for the new tonnage tax regime or remain within the normal corporate tax structure.

The tonnage tax scheme suggested by the Rakesh Mohan panel was ignored by Mr Sinha while presenting the 2002 Budget. Instead, he preferred to expand the scope of Section 33 AC which dealt with development rebate for ship acquisitions.

Having seen the gains of an expansion in the definition of Section 33 AC covering twice the paid-up capital, reserves and surplus announced in the Budget come under threat from the Kelkar committee, the shipping industry is pinning its hopes on the tonnage tax to sail it through turbulent times for ever, the Shipping Ministry officials said.

The CCS had sought suggestions from the Shipping Ministry on ways to prevent shipping companies from registering their vessels in tax havens abroad in the absence of proper fiscal incentives in India and augment national tonnage from a national security perspective.

The Ministry had proposed a tonnage tax system and rationalisation of tax regime for Indian seafarers as the two most vital inputs for encouraging the growth of Indian tonnage.

``Tonnage tax is the only way that Indian shipping can grow,'' the officials said.

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