Draft Report of the High Level Group on Services Sector

Chapter 4: Shipping Services

India is not a large shipping nation in terms of its merchant fleet and at the beginning of 2006 it was ranked 20^th in terms of its fleet size in gross tonnage (gt) by flag of registration, constituting 1.16 per cent of the world fleet size. The Indian shipping fleet’s share in the carriage of India’s own overseas trade has in fact been slipping over the years. In transportation services also India’s RCA Index has been on the decline. However, it is not that Indian shipping is inherently incompetitive but that it does not have enough capacity to carry more of Indian cargo.

Foreign ship owners would normally be inclined to obtain the services such as P&I insurance, brokerage/commission, banking etc from Foreign Service suppliers and pay no service tax as these taxes are either exempt or zero rated. On the other hand the Indian ship owners would have to pay service tax on all these services supplied by foreign and domestic service suppliers. In order to even out the differential incidence of service tax on Indian and foreign ship owners it is necessary to take the following measures:

1. 
   Shipping companies should be exempted from service tax on all services provided from outside India, whether received in India or outside.
   
2. 
   Shipping companies should be exempted from service tax on all services provided within India in respect of services in which they have the option to employ service suppliers from abroad or from India such as P&I, ship management fees, repair and maintenance, commission and brokerage, and manpower recruitment. This will have the effect also of encouraging the shipping companies to obtain the services from Indian suppliers.
   

In India profit on sale of vessels is not covered under the tonnage tax regime. The company availing of the tonnage tax regime is liable to pay MAT. The Group was shown extracts from the relevant laws prevailing in the United Kingdom, Singapore, Ireland, Netherlands, Germany, Spain and Belgium, all of which showed that the profit on sale of vessels is covered within the scope of tonnage tax regime. In light of the practice in these important shipping nations it would be necessary to provide in our tax laws also that the surplus resulting from sale of vessels is covered within the scope of tonnage tax regime.

The Indian tonnage tax regime requires the creation on a compulsory basis of a special reserve to be utilised for acquisition of tonnage within a period of eight years. While waiting for the accumulation of sufficient reserves and the opportune time for acquisition of tonnage the amounts in the reserve earn interest, which is liable to income tax at present. In Double Taxation Agreements with a number of countries, viz., Belgium, China, Denmark, Germany, Netherlands, Mauritius, South Africa, Sri Lanka and the USA, interest on funds has been treated as income arising from shipping operations. Consistency of approach in our tax laws would also require the interest income to be treated as income from shipping operations and brought within the purview of the tonnage tax regime. There is therefore a case for the interest earned from special reserves to be treated as income from core activities and covered within the scope of the tonnage tax regime.
The Group was of the view that Indian shipping companies were being put to a serious disadvantage by the way the Indian income tax laws were being applied to Indian seafarers working on Indian flag vessels and an appropriate solution had to be found to provide a level playing field to Indian flag ships on taxation of Indian seafarers.
The withdrawal of exemption from withholding tax on remittances of interest on ECBs taken on or after 1-6-2001, has adversely affected the Indian shipping industry. Presently, the interest paid by Indian shipping companies to foreign lenders on acquisition of ships is subject to withholding tax at the rate of 20 per cent which may be reduced to 10-15 per cent as provided in the respective DTAAs. The Group was of the view that in order to provide a level playing field on taxation matters, the exemption from withholding tax on interest paid to foreign lenders under Sec. 10(15)(IV) C of the Income Tax Act 1961 should be restored for Indian shipping companies.
In India payment towards in-chartering of foreign flag ships is being treated as use of ‘equipment’ under Section 9(1) (VI) the Income Tax Act making the charter hire charges taxable as a royalty and withholding tax is payable @10 per cent. The Group was of the view that both from the point of view of consistent interpretation of law and providing ships with Indian flag with a level playing field on taxation matters no withholding tax should be levied on in-chartering of foreign ships.
For implementing the policy of cargo support to Indian ships, the Central Government established TRANSCHART as the chartering wing of the Ministry of Shipping in 1958 to centralise the shipping arrangement for all Government and canalised cargo and the wing is still in existence. The Group considered the continuation of the policy of cargo support to flag ships through TRANSCHART in future and came to the conclusion that since the competitiveness of Indian ships was diminished by the tax handicaps and since the growth of Indian shipping needs to be encouraged, the cargo support policy needed to be continued. The policy could be revisited after progress has been achieved in eliminating the tax handicaps of Indian shipping.
In the evolving context of India’s growing energy demand and consequent dependence on global energy markets, the Group also considered the urgent need to own and develop a national “core” fleet in the energy sector. It is felt that this core fleet of strategic marine assets, similar in concept to the United States “Sea-lift Command”, can be used in case of national emergency and/or war to ensure energy security, by means of un-interrupted transport and service of essential commodities such as crude oil, petroleum products, gas, coal and offshore oil fields.
Coastal traffic has a share of more than 25 per cent in the traffic of major ports. It is expected to grow from a level of about 110 MMT in 2004-05 to 220 MMT by the end of the XI Plan period (2011-12). As mentioned earlier the policy on cabotage was a subset of the policy of cargo reservation whereby foreign flag ships were not to be permitted to carry coastal cargo. The Group considered the cabotage policies pursued by advanced maritime nations and noted that the US and Chinese cabotage laws are quite restrictive in the world. The Group took the view that the policy on cabotage needed to be continued. The brand value of the national flag can be maintained only through such policies like first right of refusal and cabotage.