Bangalore: The shipping ministry wants ships to be tagged as infrastructure so that shipping firms can avail of funding and refinance pledged by government-backed lenders earlier this week for infrastructure developers, a ministry official said.

Better story: A ship at the Jawaharlal Nehru Port. A decline in rentals has pulled down ship prices, and volatility in shipping equities has created opportunities for shipowners to buy assets at a discount. Ashesh Shah / Mint

“We are drafting a proposal for granting infrastructure status to ships," the official said on condition of anonymity.

He added that the proposal will need the backing of the finance ministry, which is now headed by Prime Minister Manmohan Singh after P. Chidambaram was appointed minister of home affairs.

If the move is successful, the shipping industry will be able to avail of tax holidays and access to the same special funds currently available to firms operating in sectors that include roads, bridges, railways, seaports, airports, inland waterways, urban transport and infrastructure projects in special economic zones, among others.

On 7 December, the government allowed India Infrastructure Finance Co. Ltd (IIFCL) to raise Rs10,000 crore through tax free bonds by March as part of an aid programme worth Rs32,000 crore to trigger infrastructure investments to stimulate the economy.

Best time to buy

“This is the best time to buy ships and secure capacity if you have money so that in future, when the market is up, owners can make money," said R. Srinivasan, executive director at Chennai-based dry bulk shipping firm West Asia Maritime Ltd.

A steep decline in ship rentals in the past three months has pulled down ship prices, and volatility in shipping equities has created opportunities for ship owners to buy assets at a discount.

A $20 billion (Rs97,400 crore) investment plan of local ship owners to replace parts of their ageing fleets and expand capacity has run aground due to embattled global banks, especially ship finance specialists in Europe, drastically reducing funding for new buys.

“Infrastructure status will allow us to access infrastructure funds and loans for financing ship purchases," said B.K. Mandal, finance director at state-run Shipping Corp. of India Ltd, the country’s largest ocean carrier. The firm plans to buy 40 ships worth close to $2.6 billion in the next four years.

Mandal also said tax reduction was not the primary focus of local shipping firms because they are covered by the Tonnage Tax Act of 2004, under which ships are taxed on the volume of cargo they carry instead of corporate tax rates.

As a result, these firms typically pay only 1-2% tax, against 30.9-33.9% other Indian companies pay.

However, the local shipping industry claims that other taxes such as service tax, minimum alternate tax and sales tax on freight, besides others, offset the benefits from tonnage tax.

According to the Indian National Shipowners Association (Insa), a body that represents India’s shipowners, local companies need to invest close to $20 billion in the next five years to replace parts of their fleets and comply with the stipulation of the International Maritime Organization, the global maritime regulator, to replace single-bottom tankers with double-bottom ones by 2010.

Indian shipowners have already set aside a sum of at least $600 million in a reserve account to be used only for buying ships.