Draft Report of the High Level Group on Services Sector

Chapter 4

Shipping

India is not a large shipping nation in terms of its merchant fleet and at the beginning of 2006 it was ranked 20th in terms of its fleet size in gross tonnage (gt) by flag of registration constituting 1.16 per cent of the world fleet according to Lloyd’s-Fairplay “World Fleet Statistics 2006”. The world cargo carrying fleet has been experiencing a boom in recent years and has grown from the level of 464.99 million gt in 1995 to 528.79 million gt in 2000 and further to 687.98 million gt in 2006. In India there was slow growth in the size of the fleet during this period but tax reform with effect from 1.4.04 induced impressive growth thereafter, from below 7 million gt on 1.4.04 to more than 8.5 million gt on 1.4.06 and more than 9 million gt on 1.10.07.

The Indian shipping fleet’s share in the carriage of India’s own overseas trade has been slipping over the years. While India’s merchandise trade has been increasing by over 20 percent per annum in terms of value over the past few years and the sea borne trade has risen from 224.62 MMT in 1999-2000 to 447.14 MMT in 2005-06 the share of Indian ships in the carriage of India’s overseas trade has fallen from 31.5 percent in 1999-2000 to 13.7 percent in 2005-06.
We have seen in Chapter I that in transportation services India’s Revealed Comparative Advantage Index has been on the decline. Since international movement of goods by sea constitutes a large proportion of transportation service transactions¹² this decline reflects a weakening in the competitive situation of Indian shipping as well. It is not that Indian shipping is inherently incompetitive but that it does not have enough capacity to carry more of Indian cargo. The additions to the Indian fleet have been concentrated mainly in oil tankers (in which the capacity has increased from about 3.0 million gt as on 1-4-2002 to 4.7 million gt on 1-10-2007) while in others such as bulk carriers and liner vessels there has been an actual fall in the gross tonnage. According to the Report of the Task Force on Financing Plan for Ports the sea borne traffic at major Indian ports is likely to rise to 708 MMT by 2011-12 from 464 MMT in 2006-07, with the container traffic registering the maximum increase.
Bulk carriers and tankers constitute a large proportion of the country’s merchant fleet accounting for around 85% of the tonnage. Due to the growing energy demand in the country there is potential for Indian ship owners to expand their tanker fleet even further. Apart from this there is scope for them to add offshore supply vessels to cater to the planned programme of oil and gas exploration in the country. The programme for expansion of ports and deepening of channels has also created a big opportunity for addition of dredgers to the Indian fleet.

The unwillingness of Indian entrepreneurs to add to the merchant fleet is not due to a dearth in availability of trained seafarers in the country, although there is a problem associated with the taxation regime relating to seafarers with which we shall deal later, which has led to shortage of officers to man Indian ships. Indian seafarers are internationally acclaimed for their know how in ship operation and management. India’s share of global maritime manpower is currently 26,950 officers and 52,000 ratings comprising an estimated 6 percent of world seafarers.

As far as container shipping is concerned, it must be acknowledged that Indian entrepreneurs do have a late entrant’s disadvantage in entering the business of carriage of containers. As noted by the XI Plan Working Group on Shipping and Inland Water Transport ‘container shipping companies that succeed in their business are the ones that succeed in combining or commanding expertise in shipping with container handling, logistics management and multimodal operations for the efficient carriage of small lots of containers for different ports and the return of empty, preferably stuffed containers back to their mother ships.’ At present 61 percent of the containers originating in or destined for India are being transhipped from Colombo. The assessment of the XI Plan Working Group is that given the complexity of container movement and the lack of expertise in the country in container handling and the level of sophistication of container logistics management the growth of Indian flag will for some time remain confined to feeder vessels. Apart from the above difficulty in achieving quick growth in container related fleet size the shipping industry does not suffer from any inherent handicap.
In fact the burgeoning growth of India’s sea borne trade and the long tradition as a provider of seafarers to the world shipping, India should be in a strong position to expand its merchant fleet and aspire for a larger share of carriage of its international cargo. Since ships with foreign flags compete for Indian cargo on equal terms with Indian flag vessels the latter’s competitiveness is strongly influenced by any differential in the fiscal regimes. 29 countries accounting for more than 70 percent of the world tonnage, including the Flags of Convenience countries, give wide flexibility to the ship owners registered in those countries in their operations along with low taxation levels under the Tonnage Tax scheme. Many European countries and Korea, which account for about 15 percent of world tonnage, have adopted a dual tax system under which the Tonnage Tax scheme is offered as an alternative option to the corporation tax scheme. Since the lower taxes in other maritime nations was a major disincentive to Indian shipowners to expand their tonnage, the Government of India introduced Section 33 AC in the Indian Income Tax Act 1961 with effect from 1.4.90. Under this provision the shipping companies were given the benefit of transferring into a Special Reserve a part of the profits derived from shipping operations up to twice the paid up share capital, the general reserves and the amount credited to the share premium account of the company. The amounts so transferred into the Special Reserve were to be utilized for purchasing ships within eight years. Although Section 33AC was estimated to have reduced the incidence of direct tax on shipping companies to about 15 percent it failed to adequately encourage acquisition of new tonnage by Indian ship owners.
The decision to adopt the tonnage tax system with effect from 1.4.04 had a much more favourable effect and boosted the growth of Indian merchant fleet. Under the new regime shipowners can opt for the tonnage tax whereby income tax is levied on the basis of presumptive income of the Net Tonnage (NT) of each ship owned by Indian shipowners determined according to a fixed scale. It has been estimated to have reduced the incidence of tax to a level of around 3 percent. The new regime imposes two obligations on the shipowners: they have to transfer 20 percent of the book profit derived from shipping operations to a Special Reserve (Tonnage Tax Reserve) account to be utilized for additions to tonnage within eight years and they have to train officers in the ratio of one trainee officer for a complement of 10, based on Safe Manning Document employed by them. The shipowners are also subject to the restriction that they cannot in-charter more than 49 percent of the NT (including the NT owned by them) operated by them in any previous year.