Bangalore: India’s maritime regulator, the Directorate General of Shipping, has cut short an experiment by a top shipping firms to register some of its fleet outside the country without opening subsidiaries abroad for such purposes.
Beginning 2007, India’s second biggest shipping firm by fleet capacity, Mercator Lines Ltd, directly registered five of its ships outside India—one oil supertanker in the Marshall Islands and four dredgers in the Indian Ocean island nation of Comoros—without opening subsidiaries in these tax-friendly nations.
“These cases were reviewed earlier this year by the director general of shipping and having regard to the fact that they were Indian ships requiring registration under Indian flag as per section 22 of the Merchant Shipping Act, the company was advised to register the vessels under MS Act,” Lakshmi Venkatachalam, director general of shipping, told Mint. The Merchant Shipping Act, or MS Act, governs India’s maritime sector.
“On request, Mercator was given a time limit to complete the registration process within six months. The company has complied by registering four dredgers under MS Act. Regarding the fifth vessel, an oil supertanker, we have given extension up to December 2009 for registering the same under MS Act,” Venkatachalam said.
Mercator confirmed the development, but declined to elaborate.
This brings the curtains down on an episode that had stirred interest among local shipowners. If allowed by the regulator, it would have led many other local fleet owners to register ships outside without opening subsidiaries.
Local shipowners have been registering ships in tax-friendly nations such as Singapore, but never directly, sitting in India. These firms float subsidiaries abroad to be able to own and register ships outside India.
Mercator itself has a listed subsidiary in Singapore that owns and operates dry bulk carriers. But the latest move by Mercator was a gamble that did not pay off.
Mercator registered some of its ships outside India to skirt tight local regulations on staffing, yet at the same time, somehow try to reap the benefits of tonnage tax, a levy based on the cargo-carrying capacity of ships that reduces the tax burden of shipping firms.
The tonnage tax scheme was introduced by the Union government from 2004 as a substitute for corporate tax. At least 90% of the global shipping fleet operates on tonnage tax, where the tax burden is just 1-2% of their income, compared with the corporate tax rate of 33.9%.
For local shipowners, being able to directly register ships abroad would mean freedom from stringent staffing requirements. Under the MS Act, ships registered in India have to hire only Indian nationals as officers and crew.
Though India eased the clause on hiring only Indian nationals to man Indian ships in 2008, shipowners say strict conditions still apply to employment of foreign nationals from select countries.
It would also free them from 12 different taxes applicable to Indian registered ships.
Ships and dredgers registered outside India are not eligible to claim benefits under the new tonnage tax scheme.
However, Mercator has claimed tonnage tax benefits for the five ships registered outside India under the hired ships category. According to the Tonnage Tax Act, a firm can claim tonnage tax on ships hired from within India or abroad to carry cargo, subject to a ceiling not exceeding 49% of its owned shipping capacity.
For instance, if a shipping firm owns ships totalling a cargo carrying capacity of 100 million deadweight tonnes (dwt), it can hire an additional 49 million dwt from others and claim tonnage tax on 149 million dwt in a year.
“This incident shows that there is no choice for an Indian company but to register its owned ships in India,” said S. Priya, a Mumbai-based advocate specializing in maritime law.