4.1.5 Withholding tax on ECB interest 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% which may be reduced to 10-15% as provided in the respective DTAAs. The Indian National Shipowners’ Association drew attention of the Group to the fact that around 70% of the world tonnage operates from flag of convenience countries such as Panama, Liberia, Bahamas etc. where there was neither any ECB restriction nor withholding tax. Interest paid on loans for acquisition of ships is exempted from withholding tax in other maritime nations also. In Singapore complete exemption from withholding tax is provided on interest paid to foreign lenders if the loan is utilised for purchase of vessels to be registered under the Singapore flag. For the present the exemption window is for the period of 1st Nov. 2003 to 31st Dec. 2008. In Netherlands, there is no withholding tax on interest and in case of a non-resident having zero/less than 5% shareholding, the Netherlands sourced interest income is not subject to domestic tax. Similarly, under the domestic law of Germany, there is no withholding tax on interest paid to non-residents. Since almost 75 to 80% of the funding for ship acquisition is through foreign lending, 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.
