Local shipowners must register ships in India, says regulator.
Last year when local shipping firm Mercator Lines Ltd directly registered five of its ships outside India—one oil tanker in the Marshall Islands and four dredgers in the Comoros—without opening subsidiaries in these tax-friendly nations, it was considered a bold move challenging the country’s maritime rules.
Never in the 50-year history of the Merchant Shipping Act, 1958 (MS Act), the law that set rules and regulations for India’s maritime sector, has anybody done something like this. But for India’s second biggest private shipping firm, it has turned out to be a misadventure.
Backed by legal opinion, the directorate general of shipping (DGS), India’s maritime regulator, has now asked Mercator to bring these ships back to India and get them registered under the MS Act by June. Such a registration is mandatory when a shipping firm registered and operating in India buys a ship, the regulator told Mercator.
Before registering the five ships abroad, Mercator had taken legal opinion from Mumbai-based shipping law firm Bose and Mitra and Co., which said that “a shipping company registered in India can register its ships outside India”. A section of the local shipping industry also supported the view.
By registering some of its ships outside India, Mercator was trying to skirt tight local regulations on staffing and, at the same time, reap the benefits of tonnage tax, a levy based on the cargo carrying capacity of ships that reduces the tax burden of shipping firms.
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The tonnage tax scheme was introduced by the 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 the operating revenues, much lower than the 30-35% under corporate tax.
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 in July, shipowners say strict conditions still apply to employment of foreigners.
It would also free them from 12 different taxes applicable for Indian-registered ships. To qualify for tonnage tax benefits, ships have to be registered in India. Mercator has applied for tonnage tax benefits for the five ships registered outside India under the so-called owned ships category. The maritime regulator, tasked with the implementation of the tax scheme, has rejected this submission. Instead, it has agreed to extend tonnage tax benefits to these ships 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 dead weight tonnes (dwt), it can hire an additional 49 million dwt from others and claim tonnage tax on 149 million dwt in a year. To be more precise, if a shipping firm owns four ships, it can hire a maximum of two ships and claim tonnage tax on six ships in a year. The regulator says Mercator was well within the 49% ceiling on hired ships to claim tonnage tax benefits. But the question here is how can Mercator hire its own ships registered abroad without floating a subsidiary and still be allowed to claim the benefits of tonnage tax till the time they are registered in India. There is also a lack of clarity on the basis on which the directorate general has issued trading licences to these ships.
The regulator has not given a clear and proper justification for granting trading licences and also allowing Mercator to get tonnage tax benefits on the five ships. The law is very strict on those found abusing the tonnage tax scheme. Firms making wrong declarations or misrepresentations to claim benefits would be expelled from the scheme without any scope for a re-entry later.
Besides, their income will be reassessed from the time they entered the tonnage tax scheme and subjected to corporate tax at the rate of 35%.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org