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Business News/ Opinion / India may allow fleet owners to register ships overseas
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India may allow fleet owners to register ships overseas

Plan aimed at reversing a trend of local fleet owners opening subsidiaries abroad to register and operate ships to increase the national shipping capacity

The proposal, which needs the government’s approval, involves giving a relaxation from this law to Indian shipowners so that the task of registering ships overseas becomes official and legal. Photo: BloombergPremium
The proposal, which needs the government’s approval, involves giving a relaxation from this law to Indian shipowners so that the task of registering ships overseas becomes official and legal. Photo: Bloomberg

India’s maritime regulator, the director general of shipping, is pushing for a plan that allows local shipping companies to register their ships in tax-friendly overseas jurisdictions without opening subsidiaries, in a bid to increase the national shipping capacity.

The proposal will allow local shipping companies to directly register their ships overseas sitting in India without opening subsidiaries abroad to create a new fleet category known as Indian-controlled, foreign-registered ships.

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.

Local laws do not allow an Indian shipping company to register ships outside the country. The proposal, which needs the government’s approval, involves giving a relaxation from this law to Indian shipowners so that the task of registering ships overseas becomes official and legal.

It will also help Indian shipping companies raise cheap funds overseas without any of the attendant problem associated with Indian-registered ships. The Indian flag is not considered a friendly flag by international lenders for various reasons.

Local shipowners have been registering ships in tax-friendly nations such as Singapore, but never directly. These firms float subsidiaries abroad to be able to own and register ships outside India. Unlike the subsidiary route for registering ships overseas where only the dividends can be repatriated back to India, the Indian-controlled, foreign-registered ships category allows fleet owners to receive full revenue from ship operations.

Besides, the Indian-controlled, foreign-registered ships will also get second preference for moving cargo on local routes. Such preference is now limited to full-fledged Indian-registered ships.

The package proposed by the regulator will come with conditions such as mandatory training of Indian seafarers by Indian-controlled, foreign-registered ships. 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.

A few years ago, a prominent Indian shipping company took a bold decision to register five of its ships overseas without opening a subsidiary abroad, but had to convert the fleet to the Indian flag after the maritime regulator ruled that it violated local laws on ship registration.

This shipowner registered some of the ships outside India to skirt several tax and regulatory issues facing local shipowners here, yet, at the same time, somehow try and reap the benefits of tonnage tax that reduced the tax burden on shipping firms.

The incident had stirred a lot of interest among local fleet owners at the time. Legal opinion, though, was divided on the issue with some backing overseas registration of ships without floating subsidiaries, while others said that Indian shipowners have to mandatorily register their ships in India.

The maritime regulator took the stand that local fleet owners have no choice but to register their ships in India. 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.

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 the market 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 proposal mooted by the maritime regulator seeks to include Indian-controlled, foreign-registered ships also within the ambit of the tonnage tax.

P. Manoj looks at trends in the shipping industry.

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Published: 09 May 2014, 12:17 AM IST
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