Draft Report of the High Level Group on Services Sector

4.1.4 Seafarers’ Taxation- Cost to Employer

Ships registered in India are statutorily required to be manned by trained/ qualified and experienced personnel who can effectively implement quality systems and maintain high value assets to prevent accidental losses and environmental degradation. Indian ships face acute shortage of experienced manpower, mainly officer category, because ships under foreign flags are able to offer so-called ‘tax free’ pay packet to them. The differential tax treatment of manpower is not really intended in our tax laws but is the result of circumstance. For the payment of income tax an Indian citizen employed as a seafarer may be treated either as resident or a non-resident (in case his stay is outside India for more than 182 days). For their earnings outside India as non-resident they pay no income tax while for their earnings in India they pay income tax. If a seafarer is employed on a vessel of Indian flag the employer is obliged to deduct income tax at source and the deduction is meticulously made for the full period the vessel has spent in Indian waters. On the other hand a foreign flag owner is under no obligation to deduct income tax at source leaving it to the seafarer to make appropriate declaration in the income tax return. Since there is no proof on the passport on how much time the vessel (or the seafarer) has spent in Indian waters the seafarer makes the declaration on the basis of entries in the passport thus escaping from the tax net for he period the vessel has spent in Indian waters. In this manner the seafarer gets a tax advantage while working on foreign flag vessels. Naturally the preference of all seafarer will be to work on ships of foreign flag unless the Indian shipping company is willing to reimburse the income tax paid. This results in increasing the cost for Indian ships in employing seafarer. Because of the differential tax treatment received from Indian and foreign ships qualified and experienced seafarers avoid to work on Indian shipping companies thereby given foreign shipping companies an advantage.
A comparative table showing the tax regime for seafarers in India and selected maritime countries is attached at Annex I. It would be seen that there is wide variation in practice of taxation on seafarers. While some exempt taxes for all seafarers employed by vessels, whether of national or foreign flag, others exempt only seafarers employed on board the ship flying the national flag. In some countries employers are entitled to reduction in tax on the salaries payable to seafarers while in others the seafarers serving on national flag vessels pay a much lower income tax on a flat rate.

Having regard to the international practice INSA has suggested three alternative solutions for consideration of Government:

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  Easing of procedural constraint by counting the seafarers stay outside the country on the basis of dates stamped on the CDC.
  
• 
  Non-resident status for the purpose of taxation of salary income of seafarers being granted on the basis of stay of 120 days outside the country instead of 182 days.
  
• 
  Instead of the current system of tax on accrued income basis a flat tax being levied on all Indian seafarers irrespective of their residential status and/or the flag status of the shipping company they work for.
  

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.