‘Shipping Taxation: A Calculate Determination’

Himanshu Doshi
Senior Manager | Infrastructure, Industrial &
Consumer Ernst & Young LLP

Samir Kanabar
Partner |
Tax and Regulatory
Services Ernst & Young LLP

The taxation system in India applicable to the Indian shipping industry is unfavourable with global standard, so it is imperative to boost the shipping industry and the port industry through tax regimes and other tax regulatory reforms. The articles provides in-depth insight into the current tax challenges being faced by the Indian shipping industry and suggests some key initiatives in tax reforms to revamp the sector.

The shipping industry operates in a highly globalised and competitive business environment. By virtue of being closely linked to the world economy and trade, it is more liberalised (from a tax perspective) than most of the other industries in the world. In many countries having a fairly extensive coastline, the maritime infrastructure development has attracted significant investments, which has impacted the pace, structure and pattern of development in those countries.

Approximately 90 per cent of global trade (in terms of volume) is carried out through sea, making the shipping industry a key participant in world trade.

India has an extensive coastline of around 7,500 km. The country’s maritime industry encompasses ports, shipping, inland water transport, as well as aids to navigation and manpower engaged in operations both on board and ashore. Around 95 per cent of India’s external merchandise trade by volume, and 70 per cent by value, is through maritime transport.

In order to provide an impetus to the economic growth of the country, it would be imperative to boost the shipping industry and the port industry through tax and other regulatory reforms coupled-with resolution of the current tax challenges being faced by the shipping industry.

Majority of the countries over the world provide for a tax regime which is low-level taxation linked to vessels tonnage rather than actual revenue. Accordingly, with the intention of making the Indian shipping industry globally competitive, providing Indian shipping companies with a level playing field through the reduction of taxes, the Indian Government introduced the Tonnage Tax Scheme (TTS) in the Finance Act, 2004.

The TTS is optional scheme i.e., if a company does not wish to specifically opt for this scheme, it would continue to be governed by the normal provisions of the Income-tax Act. However, such a beneficial tax regime is only available to Indian companies.

While the world over, the tax regime is relaxed for the shipping industry, the Indian government has provided certain additional stringent conditions which are not in sync with the international tax practices followed by other countries. Further, there are certain types of income which would be chargeable to tax under the normal provisions of the Income-tax Act, even though the company has opted for TTS. Some of the issues faced by the industry have been enumerated hereunder:

• Determination of Tax Residential Status of Seafarers
Supplement to the reforms required in the shipping industry, a major concern is towards the procedural difference in determination of tax residential status of seafarers working on Indian ships and those working on foreign ships. This procedural difference has resulted in a large scale drift of skilled seafarers to foreign ships thereby leading to a shortage crisis of qualified personnel to the Indian shipping companies.

• Income Earned on Investment Linked to Mandatory Reserve
A company which has opted for TTS is statutorily required to transfer at least 20 per cent of the book profits arising from its shipping business to a reserve account which has to be utilised towards the acquisition of ships.

Since the cash is required to be made available for the acquisition of ships pending utilisation of the same, such cash may be deployed in short-term instruments. The Act does not contain specific provisions to include the income earned/accrued on such instruments as part of the tonnage income, despite it being directly attributable to shipping activity. Further, deploying such income towards mandatory purchase of ships may not be in line with the company’s expansion strategy.

• Capital Gains
In the shipping industry, replacing old and obsolete vessels and upgrading vessels with newer technology is essential. Accordingly, the qualifying vessels are required to be sold as a part of the shipping business.

However, any profits or gains arising from the transfer of qualifying capital assets are chargeable to income tax as capital gains under the normal provisions of the Act. The profits arising from the sale of qualifying ships are not considered as tonnage income under the TTS, which, if done, would automatically result in the creation of reserves (as discussed above) for the acquisition of more new ships, thereby further augmenting the shipping business. Whereas, most of the jurisdictions wherein such tax incentives/schemes are prevalent, profits or gains arising from transfer of such assets are included in the tonnage income and exempted from tax.

The key indirect taxes applicable to the shipping industry and the challenges being faced by the industry are summarised below:

Key Issues and Challenges Faced by Shipping Industry
No CENVAT Credit in Respect of International Transportation Services:
  • Non eligibility to claim refund of taxes and duties paid on inputs, input services and capital goods result in high costs relating to transportation of goods. This has a serious impact on the Shipping industry and is a stumbling block to the development of the international transportation business.
  • Globally, major maritime jurisdictions like UK, Singapore, Netherlands, Greece etc, give full credit of taxes paid on inputs used for export and import cargo.
  • Hence, there is a need to allow CENVAT credit in respect input services and inputs used for international transportation services.
Service Tax on Time Charter for a Period up to One Month:
  • Time charter services provided by an Indian shipping company to a foreign shipping company for a period up to one month would attract service tax. However, if similar services are provided by foreign shipping companies to foreign customers, service is not taxable since place of provision of services is outside India.
  • Time charter services provided by an Indian shipping company to an Indian customer for up to one month would be liable to service tax. However, if similar services are provided by foreign shipping companies to an Indian customer, service tax would not be applicable since place of provision of services is outside India.
  • This results in a disparity in levy of service tax on services provided by Indian shipping companies vis-à-vis foreign shipping companies.
No Service Tax Exemption on Services Received by Shipping Companies:
  • Service tax is currently imposed not only on various services availed by the Indian shipping companies domestically but also on some of the crucial services availed by them outside India.
  • Globally, in major maritime jurisdictions like UK, Singapore, Netherlands, Greece etc, taxes relating to the shipping industry are either zero rated/exempted, whether such services are availed domestically or internationally by non-resident or resident ship owner.
  • Government should consider the proposition to grant an upfront service tax exemption on services received by shipping companies.
Lower Service Tax Abatement on Coastal Shipping Services:
  • Services of ‘transport of coastal goods and goods transported through national waterways and inland water’ are liable to service tax with an abatement of 50% (effective rate - 6.18%).
  • However, the abatement percentage is higher for rail transport services (70% - service tax rate of 3.708%) and for road transport services (75% - service tax rate of 3.09%).
  • The present anomaly results in a cost disadvantage to Indian shipping companies vis-à-vis providers of road transport services and rail transport services.
Over and above the evident misgivings and stringent conditions of the TTS, in spite of India having such a vast coastal line, India has very few major operating ports. This fact coupled with the lack of infrastructure facilities available to the industry players, the Indian Government needs to bring about a rampant change in the policies not only resolving the stringent conditions but also providing additional tax and regulatory benefits such as giving ship-builders infrastructure status which may not only attract foreign investment but also tax-breaks available to the Infrastructure industry.

(The views expressed by authors are their personal)