Centre pins two riders to tonnage tax migration

Domestic shipping firms will have to restrict their in-chartered tonnage to 49 per cent and also earmark 20 per cent of their book profits into a special reserve for acquiring ships to qualify for tonnage tax. Ships have to be acquired within eight years of the reserves being created.

The two conditions have been stipulated by the government for companies to qualify for paying tonnage tax instead of corporate tax.

The Indian norm, despite being largely modelled on that of the UK, is stricter than the UK norm which allows in-chartered tonnage to be as high as 75 per cent.

"The conditions have been laid down so that ship acquisition in the country gets a fillip. We in the association were keen on the 49 per cent ceiling so that tonnage tax benefits genuine companies and not the non-serious ones," said S S Kulkarni, secretary-general of the Indian National Shipowners Association.

Shipping companies globally have two ways of acquiring ships. The first is to buy them outright or second is to hire them for a specific period, which, in industry parlance, is dubbed in-chartering.

The tonnage tax regime will come into force with retrospective effect from April 1, 2004. Companies have the option of migrating to this between October 1 and December 31, 2004. Any company that opts for the regime has to stay locked in for 10 years.

Tonnage tax is computed on notional income of a shipping company based on the weight of its fleet and will have to be paid irrespective of whether a company makes profits or losses. This would work out to around 2 per cent against the corporate tax level of about 35 per cent.

Indian shipping companies had been clamouring for tonnage tax for the last few years saying that this would give them a level playing field since 85 per cent of global tonnage pay tax at 0 per cent to 2 per cent levels.

The industry had argued that this system would result in not only substantial tax savings but also fleet addition. A report submitted in January, 2002 by a committee headed by former advisor to the finance ministry and now deputy governor of the Reserve Bank of India, Rakesh Mohan, too had supported the introduction of tonnage tax.

The committee had estimated that shipping industry paid $171.24 million in taxes from 1996-97 to 2000-01. On the other hand, it said the adoption of tonnage tax would have resulted in a tax outgo of only $32.14 million in the same period, a saving of $139.10 million. This savings could have been leveraged to raise debt and add substantially to fleet capacity.

The industry had been expecting the introduction of the levy in the Budget proposals of 2003-04 but it found a mention for the first time in the interim Budget announced earlier this year by the then finance minister Jaswant Singh. Finally, finance minister P Chidamabaram introduced it in his Budget proposals for 2004-05.

Many shipping companies had been saying in private that if tonnage tax was not introduced then they would start flying flags of convenience. This would have meant that the government would not have earned any revenue from these operations.

The industry is, however, disappointed that interest income earned out of proceeds of the special reserve do not qualify for the benefits.

Further, the industry also wants dredging companies to be allowed to avail of tonnage tax.

The road ahead

---

• Restrict in-chartered tonnage to 49 per cent

  ---

• Earmark 20 per cent of book profits into a special reserve for acquiring ships to qualify for tonnage tax

  ---

• Ships have to be acquired within eight years of the reserves being created

  ---

• Tonnage tax is computed on notional income of a shipping company based on the weight of its fleet and will have to be paid irrespective of whether a company makes profits or losses