Fifty years after the Merchant Shipping Act, 1958, set rules and regulations for the country’s shipping sector, one of India’s top shipping firms has done what no one has dared to do so far—register one of its ships outside the country even while operating here, posing a significant challenge to the law of the land.
While India’s maritime regulator, policymakers, industry executives, shipping law experts and others discuss the pros and cons (or the legality or illegality) of the early June decision by Mercator Lines Ltd, to register a large crude carrier in the tax haven of Marshall Islands, one thing becomes quite clear. Mercator was forced to do this because of several tax and regulatory issues local shipowners here face.
One of them, perhaps the most serious, is the issue of taxation of seafarers. Indian shipowners are investing billions of dollars to buy more ships to cope with the rising demand for international trade. But, what is the point in buying ships when there are no officers and engineers to operate them?
According to the Merchant Shipping Act, a ship registered in India has to hire only Indian officers and crew. However, a skewed income-tax structure has resulted in Indian shipping industry facing an acute shortage of qualified, well-trained and competent seafarers.
Indians working on Indian ships are subjected to local tax laws, while Indians working on a foreign ships are not. According to the Income-tax Act, an Indian seafarer serving on foreign ships for more than 183 days in a financial year is treated as a non-resident Indian, or NRI, irrespective of where the ship trades. On an Indian ship, the requisite period of 183 days must be spent outside India’s territorial waters to get NRI status—a requirement considered difficult to achieve simply because these ships come calling at Indian ports at frequent intervals.
This has become a disincentive for Indian seafarers to work for Indian shipping companies as the difference in pay packets due to this skewed tax structure works out to more than 200% on average. Hence, local shipowners are unable to attract enough high quality officers as the cream is lapped up by foreign owners. Of the 26,900 Indian officers currently employed on board ships globally, 8,900 are on Indian ships, while almost double the number—18,000—is on foreign ships. A plan to allow Indian owners to hire foreign nationals on a temporary basis to operate their ships—cleared reluctantly by shipping minister T.R. Baalu in early 2007—is yet to take off due to national security issues that are invariably raised by some interested party anytime such a measure is suggested.
The result: Indian shipowners face a shortage of about 1,000 officers, according to the Baltic and International Maritime Council (Bimco), world’s largest shipping body.
Indian shipping firms admit that their ships have in the past sailed with one officer less than the number prescribed by the maritime regulator. Indian ships also regularly sail without enough experienced staff on board, thereby compromising on quality, a dangerous situation to be in for any shipowner given the stringent safety standards set by the International Maritime Organization.
Very often, shipowners have to check with their human resources department on the availability of adequately trained manpower ahead of buying ships. This is a paradox as India is acclaimed as a major supplier of high-quality seafarers to the world maritime industry.
In one stroke, Mercator’s bold decision to register a ship outside India solves many of the taxation and regulatory hurdles facing the shipping industry. The owner of a ship not registered in India under the Merchant Shipping Act would be free to hire foreign nationals to man the ship. Mercator has hired Russian officers and Bangladeshi crew to operate the crude carrier. With Mercator taking the lead in this regard, many others in the Indian shipping industry will follow the course chartered by India’s second biggest private shipping firm.
A simple solution, suggested by several committees set up by the government on shipping, is to include any period spent by a seafarer working on board an Indian ship, irrespective of the area of operations, for aggregation towards the 183-day target for NRI eligibility. This would remove the disparity between Indians working on Indian ships and those on foreign ships.
But, successive finance ministers in North Block, the building in Delhi’s Raisina Hill that houses the finance ministry, has ignored the advice of experts and the shipping industry, preoccupied as it is with wrenching every rupee from the citizens. But, it’s time to look into the issue afresh to boost India’s shipping fleet, currently ranked 17th in the world in terms of number of vessels and accounting for hardly 1% of the global shipping tonnage. This, despite having a long coastline of more than 7,000km.
With the same objective, North Block had in 2004 put in place a new tax called tonnage tax, exclusively for the shipping industry based on its cargo carrying capacity, instead of the corporate tax.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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