BackBudget 2014: Booster dose for maritime sector
Arun Jaitley proposes to allow local ship owners to register their ships in tax-friendly overseas jurisdictions without opening subsidiaries there
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Bangalore/Mumbai: Finance minister Arun Jaitley announced several measures to prop up the country’s maritime sector in the Union budget, the most significant of which was permission for local ship owners to register their ships in tax-friendly overseas jurisdictions without opening subsidiaries there, in a bid to increase the national tonnage (shipping capacity).
“A policy for encouraging the growth of Indian-controlled tonnage will be formulated to ensure increase in employment of the Indian seafarers," Jaitley said in his budget speech.
The scheme will allow local shipping companies the flexibility to directly register their ships overseas sitting in India without opening subsidiaries abroad to create a new fleet category known as Indian-controlled tonnage.
The plan is also aimed at reversing a trend of local fleet owners opening subsidiaries abroad to register and operate their ships, thereby resulting in a flight of ships which would otherwise have been registered under the Indian flag.
Indian law does not allow local shipping companies to register ships overseas. Jaitley proposes to relax this rule. It will also help Indian shipping companies raise cheap funds overseas without any problems associated with Indian registered ships. Indian flag is not considered a friendly flag by international lenders for various reasons.
Local ship owners have been registering ships in tax-friendly nations such as Singapore, but never directly. These firms float foreign subsidiaries to be able to own and register ships outside India.
“Unlike the subsidiary route for registering ships overseas wherein only dividends can be repatriated back to India, the Indian-controlled tonnage allows fleet owners to receive full revenue from operating such foreign-registered ships," shipping secretary Vishwapati Trivedi said.
Besides, the Indian-controlled tonnage will also get second preference for moving cargo on local routes. Such a preference is now limited to full-fledged Indian registered ships.
The operation of the scheme, though, will be subject to certain conditions. “There will be a stipulation that the fleet owner will have to hire a certain number of Indian seafarers to run such ships as well as mandatory training of Indian seafarers by the Indian-controlled tonnage," Trivedi said.
Such ships may also get the benefit of tonnage tax, a tax based on the cargo-carrying capacity of ships as opposed to the traditional corporate tax.
The tonnage tax scheme was introduced by the central government in 2004 as a substitute for corporate tax. More than 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%.
Local fleet owners are, however, subject to a dozen other taxes which they claim have neutralized the advantages of tonnage tax.
To qualify for tonnage tax benefits, ships have to be registered in India. Ships hired from overseas are also eligible for the benefits with certain conditions.
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.
Indian-controlled tonnage can use this clause to claim tonnage tax.
Jaitley also freed Indian shipowners from the requirement of paying service tax when their ships are rented out to foreign entities for less than 30 days. So far, service tax was levied for such transactions because it was based on the location of the service provider.
Indian shipping industry had been representing that they are losing business in a tough global scenario, due to a provision in the ‘place of provision of services rules’, which is now being addressed through an amendment, Jaitley said.
Accordingly, ships hired for either short or long term, will be covered by the general rule, which is the place of location of the service receiver. As a result, service tax will not be applicable to local fleet owners.
“Indian shipping finally finds mention. It shows that the government of India is now aware that Indian shipping matters," said Anil Devli, chief operating officer (commercial) at Indian Register of Shipping, a firm that verifies ships for sea worthiness. “So for us, Acche din aa gaye", Devli, a former chief executive officer at Indian National Shipowners’ Association, a fleet owners’ lobby, said.
Coastal Shipping and Inland Waterways
Developing inland waterways can vastly improve the capacity for goods transport, Jaitley said. A project on the river Ganga called ‘Jal Marg Vikas’ (National Waterways-I) will be developed between Allahabad and Haldia to cover a distance of 1,620km, which will enable commercial navigation of at least 1,500 tonne-capacity vessels. The project will be completed over a period of six years at an estimated cost of Rs4,200 crore. Similarly, to encourage growth in the transport of goods through coastal vessels, the tax incidence is being reduced.
Shipbuilding Policy
Jaitley announced that the government will unveil a comprehensive policy to promote Indian shipbuilding industry this fiscal year.
Port Development
“Development of ports is also critical for boosting trade. Sixteen new port projects are proposed to be awarded this year with a focus on port connectivity," the finance minister said, adding the government will provide Rs11,635 crore for the first phase development of an outer harbour project at Union government-owned V.O. Chidambaranar port in Tamil Nadu.
Gujarat Model
Special economic zones (SEZs) will be developed in Kandla port and Jawaharlal Nehru port, both owned by the Union government. This is similar to the port-led development model that was successfully implemented by Prime Minister Narendra Modi when he was chief minister of Gujarat.
Setting up 16 new port projects and providing rail infrastructure to connect ports with hinterland will decongest ports, said Samir Kanabar, tax partner, infrastructure practice at audit and consulting firm EY. A visionary roadmap has been set to attract foreign investment in infrastructure sector and this will iron out some of the stress in the sector, he added.
“Rather than announcing new port projects, strengthening the existing infrastructure is the need of the hour," said S.S. Kulkarni, secretary general at Indian Private Ports and Terminals Association, an industry body.
“To this end, the budget announcement on port connectivity and 24X7 customs clearance for more ports are something to cheer about. Emphasis on relooking the public-private partnership (PPP) model is music to the ears. Much will be known in the fine print," Kulkarni added.
Although details on the role of a so-called 3P India are yet to be finalised, a positive impact on the port sector is expected from the proposed body, said K. Ravichandran, senior vice-president and co-head (corporate ratings) at ratings firm ICRA Ltd. It could address some of the obstacles faced by port developers operating through the PPP route, especially if it could support the developers in obtaining regulatory approvals and speedy resolution of pending issues, he added.
Warehousing
Jaitley said the government has plans to increase warehousing capacity for increasing the shelf life of agriculture produce and thereby, the earning capacity of the farmers.
“Keeping in view the urgent need for availability of scientific warehousing infrastructure in the country, I propose an allocation of Rs5,000 crore for the fund for the year 2014-15," Jaitley said.
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