Thirteen years after India allowed 100% foreign direct investment (FDI) in shipping, not a single global shipping company has used the option to invest and start a shipping company in the country.
There are obvious reasons for this.
The Indian flag suffers from certain barriers in terms of tax and duty structures which have impeded the flow of FDI into the shipping sector.
In shipping, ships fly the flag of the country where they are registered and are subjected to the tax laws of that country.
Shipping, being an international business with virtually no trade barriers, tends to thrive in tax-free regimes. Apart from the open-flag registries (such as Panama, Liberia and Malta that are tax havens), countries such as Singapore and Dubai offer substantial fiscal incentives for shipowners.
Global fleet-owners say that India is not a commercially viable place to register ships. India adopted a globally followed taxation system for the shipping industry in 2004 by introducing a tax based on the cargo carrying capacity of ships. The tonnage tax—a regime in which close to 95% of the global shipping fleet operates—pruned the tax outgo of Indian shipping companies to 1-2% of their income, compared with the corporate tax rate of 33.9%.
The tonnage tax is applicable only to those ships that are registered in India and fly the Indian flag.
However, the benefit of the tonnage tax has been negated by the prevalence of a dozen other taxes in India that are not applicable to ships registered overseas, reducing the competitiveness of Indian-registered ships.
These levies include service tax, minimum alternate tax on profit/loss on sale of ships, corporate income tax on other income, lease tax on charter hire charges, seafarer’s tax, withholding tax on charter hire charges paid to foreign shipowners, withholding tax on interest paid to foreign lenders, sales tax/value added tax on ship supplies/spares, customs duty on import of certain categories of ships, stores, spares and bunkers, dividend distribution tax and wealth tax.
Besides, Indian-registered ships lack government policy support or preference to carry Indian cargo. The government does not offer any kind of premium to Indian-registered ships for carrying Indian cargo.
Hence, foreign shipowners do not need to come to India to carry Indian cargo when they can access the same cargo sitting in Singapore and Dubai.
The FDI policy has worked successfully in sectors such as telecom because service providers cannot access the Indian market without being in India. That is not the case in shipping. That’s why more than 90% of India’s foreign trade by volume is carried by foreign-registered ships.
In contrast, it is easy to register ships and settle down in Singapore. The country has transparent rules and regulations and is very accommodative on tax and on employment of seafarers.
This also explains why many Indian fleet–owners have opened subsidiaries in Singapore and have registered ships in the city-state.
Another key issue that has discouraged overseas fleet-owners from looking at India is the acceptability of Indian flag vessels by international ship-lenders.
For most international lenders, the Indian flag is not an “approved" flag for financing because of a host of procedural issues.
For instance, lenders have to make do with only provisional mortgage registration as security for one-two months following loan disbursement. Indian mortgage law secures only principal and interest, whereas the norm elsewhere is a mortgage which also allows lenders to claim costs associated with re-possession of ships following a default.
India’s central bank has placed restrictions on borrowers to make default interest payments, mandatory repayments following an event of default and restrictions on corporate guarantees.
The Reserve Bank of India has also imposed average life restrictions, making the tenor and profile of ship loans inflexible.
India is also not a preferred location to arrest vessels.
It is not possible for lenders to sell vessels pending litigation. Ships are a wasting asset and idling a vessel at a port costs millions of dollars. Globally, commercially oriented courts would typically allow the sale of the ship to take place within two-three months of arrest with the understanding that litigation can continue. But in India, ships can be sold for recovering money only after the litigation is concluded. By the time this long-drawn process is concluded, the value of the ship would have eroded significantly.
India also does not have a federal admiralty law that deals with maritime disputes/cases. Instead, there are state-level laws and each state has different interpretations of the law. In particular, Indian courts have given disproportionate rights to unsecured creditors such as bunker suppliers, which is unacceptable to secured creditors.
All these will have to change if Indian companies want to tap foreign capital, for foreign lenders to get comfortable with Indian flag vessels and if the Indian shipping industry has to grow. Simply allowing 100% FDI without an enabling environment is not enough—a fact that has been clearly demonstrated by the unwillingness of foreign fleet-owners to invest in India all these years.
P. Manoj looks at trends in the shipping industry.