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Indian Shipping Taxes Criticized

by Mary Swire, Tax-News.com, Hong Kong

04 May 2010


The Indian ministry of finance has published a working paper which, among other issues, deals with rationalizing the tax and tariff system as it relates to the shipping industry, in order to make Indian services more competitive.

The paper suggests that India’s shipping has not kept pace with increasing trade.

Replacement of the 44% of the current 9.3 million gross tonnage which is likely to be scrapped over the next five years, either on completion of commercial life or on account of International Maritime Organization regulations for phasing out single hull tankers, would likely cost about USD4-5bn, according to the paper.

The Indian shipping industry has benefited from the introduction of a tonnage tax, but Indian owners are increasingly opting to own vessels in low-tax jurisdictions outside India while accessing India’s booming cargo base. Little worthwhile foreign investment has taken place due to the high taxes and rigid regulations like manning norms in India, said the paper.

The paper calls for rationalization of the 12 following direct and indirect taxes, which increase the effective tax rate of around 2% under the tonnage regime to around 9%:

  • Corporate income tax on interest and other income;
  • Minimum alternate tax (MAT) on profit on sale of vessels;
  • Dividend distribution tax;
  • Withholding tax liability on interest paid to foreign lenders;
  • Withholding tax liability on charter hire charges paid to foreign ship-owners;
  • Seafarer’s taxation cost to employer;
  • Wealth tax;
  • Fringe benefit tax;
  • Sales tax/value added tax (VAT) on ship supplies/ spares;
  • Lease tax on charter hire charges;
  • Customs duty on import of certain categories of ships, stores, spares and bunkers; and
  • Service tax.

The Paper recommends changes as follows:

  • The definition of ‘core’ activities for tonnage tax purposes should be modified to treat the incomes arising from book-profit on sale of vessels as core activities under the Tonnage Tax (TT) regime and not subjecting it to MAT;
  • Interest income from compulsory reserves should be treated as arising from ‘core activities’ of a tonnage tax company;
  • Zero rating of input services availed by the Indian shipping industry (either imported or domestically procured) - these services include brokerage, commission and finance charges, general insurance services including P&I insurance, ship management services, manpower, recruitment and supply agency services;
  • Addressing the seafarers’ taxation issue as Indian shipping companies face an acute shortage of seafarers, particularly in the officers’ category because of drift of personnel from Indian flag ships to foreign flags under the lure of higher ‘take home’ pay packets;
  • Exemptions from Customs Duty on direct import of repair materials by ship repair units and shipowners for repairs in India on import of certain vessels and on capital goods imported for shipbuilding including renewals and replacements of yard facilities from customs duty (as in any yard having both ship building and ship repair facilities, most of the assets are common and the concessions extended to one activity alone may not serve the required purpose);
  • Exemptions from Excise duty of 16% on capital goods required for construction of ships as in the case of ship repair;
  • Reinstating the exemption from withholding tax of 10% on interest paid to acquire ships abroad, which were withdrawn in 2001;
  • Similarly withholding tax on chartering of foreign vessels could be removed.

The paper discussed other options, including investment tax incentives, for supporting Indian shipping.

TAGS: tonnage tax | tax | marine | value added tax (VAT) | sales tax | India | withholding tax

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