Draft Report of the High Level Group on Services Sector

4.1.1 Service Tax

The shipping companies are liable to pay service tax @12.36% on various services rendered to them , such as cargo handling, clearing and forwarding, general insurance/ P&I, clearing and forwarding agent service, port services, repair and maintenance, steamer agents, storage and warehousing, survey, manpower recruitment and professional services. The nature of some of these services (e.g. cargo handling, clearing and forwarding, clearing house agent, port charges, steamer agent, and storage and warehousing) is such that their suppliers have necessarily to be local and at the Indian end both Indian owned and foreign ships pay the same service tax. At the foreign end no service tax is levied on foreign ship owners as shipping services are either exempt or zero rated worldwide. Indian shipping companies in terms of normal conditions of business, are obligated to obtain and consume outside India services (input services) like port services, repairs, dry-docking, cargo handling (loading/unloading), steamer agents services to name a few. But they have to pay service tax in India even on services provided from outside and received outside India unless they have been specifically exempted. Ministry of Finance notification No. 11/2006 dated 19 April 2006 on Taxation of Services (provided from outside and received in India) Rules, 2006 (Import of Services Rules) gives partial exemption from service tax and the services availed outside India in relation only to a limited list including maintenance and repair, port charges, and cargo handling. However, these rules impose service tax on services received in India from overseas such as P&I insurance, brokerage/commission, banking and other financial services, manpower recruitment, ship management services etc. Foreign ship owners would normally be inclined to obtain the services in the latter group 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:

3. 
   Shipping companies should be exempted from service tax on all services provided from outside India, whether received in India or outside.
   
4. 
   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.