The Hindu Business Line : Ministry calls for scrapping MAT on second hand ship sale

Taxing times
The Government taxes the interest income from tonnage tax reserves at the corporate income tax level by treating them as ‘other income’.
Ship owners do not want income from interest to be taxed separately and be treated as income from core operations.

Mamuni Das

New Delhi, Jan 16 To provide respite to the Indian shipping firms from paying corporate tax on the interest income of the ‘tonnage tax reserves’ in 2008-09, the Shipping Ministry has moved a proposal to the Finance Ministry.

The Shipping Ministry has also sought removal of minimum alternate tax (MAT) on the profits booked from second hand sale of ships by a ship owner. The Shipping Ministry has decided to pursue only these two demands with the Finance Ministry this year in the run up to the 2007-08 Budget, said Government sources.

The term ‘tonnage tax reserves’ is used for the ‘reserve’ built from the proceeds of about 20 per cent of profits booked by Indian shipping firms. When Indian ship owners migrated to tonnage tax regime announced in 2004, the Government mandated that a minimum of 20 per cent of profits booked by each firm be set aside and routed (by the respective firms) for investment in new ships within an eight-year period.

The Government taxes the interest income from such reserves at the corporate income tax level by treating them as ‘other income’. The Indian National Shipowners Association (INSA) has been demanding that the interest income from such reserves be treated as “income from core operations” and thus not be taxed separately.

On a cumulative basis (since 2004), Indian shipping firms (like Essar, GE Shipping, Shipping Corporation of India and Varun Shipping) have accumulated about Rs 2,000 crore as tonnage tax reserves, says INSA’s Secretary-General, Mr S.S. Kulkarni.

Given that ship buying is usually financed on a debt-equity ratio of 80:20 to 75:25, the Indian ship owners could raise up to Rs 8,000 crore with these reserves, Mr Kulkarni said. In 2005-06, about Rs 20 crore was paid as tax on the Indian ship owning firms, he said.

Another issue on which the Shipping Ministry has sought respite is imposition of MAT on profit from sale of ships, said Government sources. With all large shipyards booked for the next few years, there is a thriving second-hand ship market and ship owners are buying used ships to tide over the capacity constraints. In 2005-06, Indian ship owners paid about Rs 75 crore on account of MAT on profits from sale of ships.

INSA had also sought service tax exemption on all services availed by the Indian shipping industry in the domestic and international market. Additionally, with an aim to make jobs in Indian shipping firms attractive, INSA had sought imposition of fixed rate of tax from all Indian seafarers irrespective of their residential status and the company or flag of ship they work for.

At present, Indian seafarers have to pay tax on an accrued income basis which works out to be beneficial for sea-farers engaged in foreign flag ships. INSA had also sought that Indian shipping companies be exempted from paying withholding taxes on charter hire payments to foreign ship-owners.