GST: Rough weather ahead for shipping

Tax levy to erode global competitiveness, discourage fresh investments

The Goods and Services Tax (GST) rate structure is expected to have an adverse impact on India’s shipping industry. Industry insiders say the crucial tax reform may work against domestic shipping companies as tax imposition at the time of asset creation and discrimination between domestic and foreign shipping firms would discourage fresh investments and erode global competitiveness.

“The tax structure defeats the entire argument of equivalence of pre-and post-GST era and would add to the tax burden of Indian shipping companies,” Bharat Sheth, deputy chairman and managing director at Great Eastern Shipping, told Business Standard. While the industry has raised several points of concern in the GST tax structure, a major issue is the levy of 5 per cent integrated GST (IGST) — the tax levied both on inter-state supply of goods and services and imports — on import of vessels and on sale of ships outside India. 

“It (5 per cent levy) simply means that it will raise both our capital cost and working capital. This is very discouraging for the industry,” explained Sheth. Under the current tax regime, the purchase or sale of a ship does not attract any tax. “The type of vessels acquired by the industry from international markets are not built in India and these are mainly second-hand acquisitions of which there is no availability in India,” said Sheth. 

Both of the above defeat the argument of compensating countervailing duty and special additional duty for promoting Indian shipbuilding, Sheth said. The industry is also concerned that firms would not be able to utilise credits of such IGST for a long period of time and credit would thus become a cost in their books, adversely impacting their business operations.

If an Indian company were to sell a ship to a foreign buyer, which may perhaps have never entered India, then too it is liable to pay the 5 per cent IGST. Sheth said, “At present, sales outside India are not taxed as the situs of the sale is outside India. This position should effectively continue under the GST regime, considering the government’s intent to align rates under GST to the present treatment.” 

According to the shipping ministry, around 95 per cent of India’s trading by volume and 70 per cent by value is moved through maritime transport. Due to this, domestic shipping firms play a key role in the economic activity of the country. 

In shipping business, vessels are high-value assets and the total cash flow requirement for such acquisitions is also high. With an  extra tax burden of 5 per cent, acquisition would only become more expensive.  Sheth said under the new rules, there was discrimination between Indian shipping companies and foreign shipping companies in favour of the latter. Exports or imports of cargo services provided to the Indian consignor by an Indian shipping company would be liable for GST due to the customer being located in India. However, the same service by a foreign shipping company will escape tax based on the place of supply provisions.  This would encourage an Indian charterer to engage a foreign shipping line over an Indian shipping line since the Indian shipping company would have additional 5 per cent GST on its total freight invoice. At present, there is parity of tax treatment between domestic and foreign shipping company as there is no tax applicable. 

“Both import and export cargo must be zero-rated to plug this issue,” said Sheth.  Further, a 5 per cent duty has also been levied on voyage charters with no input tax credit provision. In voyage charters, the shipping company handles the transportation of the cargo while in time charters, the company leases the vessel to the cargo buyer who carries out the transportation of the cargo. The domestic shipping industry has made representations to the shipping ministry in this regard and the matter is expected to be taken up at the GST Council meet slated on June 3. 

“We have already made a representation regarding these issues in GST tax structure to the ministry,” informed an official with the state-owned Shipping Corporation of India . Meanwhile, the shipping ministry is hopeful of getting the issues settled with the finance ministry. 

“With this kind of tax regime for the shipping industry, no new investments will come to the sector. The industry is already in the grip of a difficult business climate. This move (GST tax structure) would be even more discouraging,” a senior shipping ministry official said.