A29 June Bombay high court ruling saying ships that are rented to transport cargo are not the same as renting out of plant, machinery or equipment, as made out by the income-tax department, has brought relief to the shipping industry.
The order helps domestic shipowners lower their tax deducted at source (TDS) payments to 2.24% of the projected annual revenues. After the Income Tax Act was amended in 2006, the I-T department had been asking local entities chartering ships from Indian owners to deduct a higher TDS of 22.4% (which was later reduced to 12.36% in the 2007 Union budget), while making payments.
The court issued its order after a petition filed by the Indian National Shipowners Association (INSA), the umbrella body representing local shipowners.
“The order has brought respite to the shipping industry,” says S.S. Kulkarni, INSA’s secretary general. “If we had lost the case, it would have impacted the cash flows of shipping firms in a highly capital-intensive industry. This would have restricted a shipping firm’s potential to grow.”
The amended definition of ‘rent’, inserted by the Taxation Laws (Amendment) Act 2006, brought freight charges and charter hire rates paid to shipping firms under Section 194-I of the I-T Act. As a result, Indian firms, such as Indian Oil Corp., Bharat Petroleum Corp. and Reliance Industries Ltd, which hired Indian ships to move cargo, were required to deduct TDS at the rate of 22.4% while making payments to shipowners.
Until the Act was amended and came into force from 13 July 2006, TDS was deducted at the rate of 2.24% under Section 194-C. This section dealt with payment for carriage of goods and passengers by any mode of transport other than by railways.
The shipping industry had argued that Section 194-I of the I-T Act is applicable only for rent for land or building including factory building, furniture, fittings or any other machinery. It was not applicable to ships and other transport vehicles and freight and charter hire payments.
“...In normal parlance, ‘plant’ does not include ‘ship’,” agreed the court.
If the I-T department had won the case, shipowners would have cumulatively paid a TDS of over Rs1,400 crore on revenues of about Rs12,000 crore earned annually from chartering out ships to third parties or for carrying cargo for their customers, estimated Kulkarni. “Because of this, shipowners would have faced an acute liquidity crisis as a big part of their gross revenues will be withheld as tax,” he added.
Shipowners can claim refund of TDS after getting an exemption certificate from the I-T department under Section 197 of the I-T Act. But after the Act was amended last year, the department has refrained from issuing exemption certificates to firms for TDS.
The court said shipping firms were entitled to exemption certificate for TDS and directed the I-T department to issue such certificates within three weeks of the order.
Local shipowners claim that a string of taxes they pay have neutralized the advantage that they got from the introduction of tonnage tax in 2004, replaceing corporate tax. Tonnage tax is a levy based on the cargo carrying capacity (net tonnage) of a ship. Local shipowners pay tonnage tax of about 1.5-2% of their profit.
Shipowners say a slew levies have already eroded the competitiveness of Indian firms.
“Compared with our foreign counterparts, Indian companies have an inherent cost disadvantage of 4-5% because of these taxes,” says Yudhishthir D. Khatau, president of INSA and managing director of India’s largest carrier of liquefied petroleum gas, Varun Shipping Co. Ltd.