Draft Report of the High Level Group on Services Sector

4.1 Taxation Issue

The industry maintains that the benefit of tonnage tax in 2004 has been eroded by certain taxes which were introduced or the rates of which were enhanced subsequently as shown below:

Particulars	As on 01.04.04	As on 31.12.07
Service Tax (Number of services covered)	76	107
Rate	8%	12.36%
Dividend Distribution Tax	13.07%	17%
Minimum Alternate Tax	7.84%	11.33%
Fringe Benefit Tax	Nil	Deemed benefit computed at varying rates on various types of expenditure which is subjected to normal Corporate Rate of 33.99%

The XI Plan Working Group on Shipping and Inland Water Transport has enumerated the following taxes and taxation practices affecting the competitiveness of Indian shipping companies and the Indian National Shipowners’ Association (INSA) has drawn attention to the same taxes and taxation practices in its presentation to the HLC:

Direct Taxes
Corporate Tax on Interest and Other Income

Minimum Alternate Tax (MAT) on profit on sale of vessels

Dividend Distribution Tax

Fringe Benefit Tax

Withholding Tax Liability on Interest paid to Foreign Lenders

Withholding Tax Liability on Charter Hire Charges Paid to Foreign Shipowners

Seafarer’s Taxation- Cost to Employer

Wealth Tax

Indirect Taxes
Service Tax

Sales Tax/ Value Added Tax (VAT) on ship supplies/Spares

Lease Tax on Charter Hire Charges

Customs Duty on Import of certain categories of Ships, Stores, Spares & Bunkers

In October 2005 the Ministry of Shipping, Road Transport & Highways had set up a Group to review the tax regime applicable to the shipping industry and the Group submitted its Report in August 2007. The following is the Executive Summary of the Group’s Conclusions and Recommendations:
‘Recognising the importance of Indian shipping to the country’s trade and economy and with a view to provide a level playing field so that Indian shipping becomes internationally competitive, the Group recommends that

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  Income such as interest income earned by tonnage tax companies should be covered under the tonnage tax regime. Further, the income from incidental activities qualifying under the tonnage tax regime should be suitably enhanced from the existing 0.25% to 1.00 % of the turn over from core activities.
  
• 
  Surplus resulting from sale of vessels should be covered within the scope of tonnage tax regime.
  
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  Indian shipping companies should be exempted from payment of dividend distribution tax on dividend declared/ distributed to the shareholders.
  
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  Indian shipping companies should not be subject to Fringe Benefit Tax (FBT) on their major component of expenditure such as travel expenses, boarding and lodging expenses etc. incurred for official purposes to ensure their competitiveness.
  
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  Indian shipping companies should be exempted from withholding tax on interest paid to foreign lenders.
  
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  Indian shipping companies should be exempted from withholding tax on charter hire charges paid to foreign ship owners.
  
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  Indian shipping companies should be exempted from the burden of grossing up of tax on salaries of seafarers received in India (even in a case where services are rendered outside India) or on salary related services rendered in India. Alternatively a fixed/ flat rate of tax (5%) be collected from all Indian seafarers irrespective of their residential status and/or the company or flag of ship they work for.
  
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  Wealth tax should be leviable only on immoveable property and that movable property should be kept outside the scope of said tax.
  
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  The ship supplies/spares provided to foreign going Indian ships should be zero rated.
  
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  The lease tax/now VAT payable on charter hire charges in each State should be zero rated for international sea going vessels.
  
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  Customs duty should not be applicable on import of stores, spares and bunkers on the supplies for use in international sea-going vessels. The 5% customs duty on import of Tugs and Pusher Crafts, Dredgers and Floating Docks/ cranes/ production platforms be removed.
  
• 
  Since in almost all the maritime countries the shipping industry is not subject to service tax either domestically or internationally, Indian shipping should also be provided with similar treatment to ensure a level playing field in their international operations. Moreover, it is imperative that no national level as well as state level fresh levies should be made applicable to the shipping industry.’
  

The High Level Group noted that the proposals for improving the competitiveness of Indian shipping was heavily reliant on tax concessions. However, the Group also took into account the fact that governments compete for getting the registration of ships done in their jurisdictions and the tax advantages they offer is the main consideration influencing the decision of investors in new shipping tonnage. Other considerations are the availability of cargo and of trained seafarers in the concerned jurisdictions. On both these aspects India was quite favourably placed. The fact that the reduction in incidence of tax in 2004-05, consequent upon the introduction of the tonnage tax regime, had led to immediate increase in Indian owned tonnage confirmed the sensitivity of decisions of investors in shipping to the tax levels. But the fact that the initial impact had tended to peter out and there was no investment from foreign investors despite 100 percent FDI being permitted indicated that more needed to be done on the tax front. The Group was of the view that in granting tax concessions to any particular sector, the Government had to be conservative and in the case of shipping only those proposals needed to be considered, which improved the competitiveness of Indian shipowners vis-à-vis foreign shipowners. Of the 12 taxes and tax practices enumerated above, according to INSA the ones that impinge the most on Indian ship owners are service tax, MAT on profit on sale of vessels, corporate income tax on interest, seafarers’ income tax- borne by employers, withholding tax on charter hire charges and withholding tax on interest on ECB, and the Committee examined these in detail.