Mumbai: Local shipbuilders such as Larsen & Toubro Ltd,ABG Shipyard Ltd, SKIL Infrastructure Ltd and the Adani Group plan to set up their new shipbuilding facilities in special economic zones (SEZs) to save on tax and improve or retain cost competitiveness.

A.M.Naik, chairman and managing director, Larsen and Tubro

This shift in approach comes amid fears about the future of the shipbuilding subsidy scheme of the Union government that ended on 14 August. There is no indication from the government so far on the fate of the scheme, under which shipbuilders received 30% of the value of orders involving ocean-going vessels more than 80m in length for the domestic market, or all kinds of ships for export.

Companies operating out of special economic zones or SEZs enjoy several incentives including income tax and import duty exemptions. Companies building new shipyards in India in an effort to cash in on a global boom in the industry are considering locating themselves in the SEZs should the subsidy not be extended.

A.M. Naik, the chairman and managing director of India’s largest engineering and construction firm Larsen & Toubro, said on the sidelines of the firm’s annual general meeting on Friday (24 August) that the company plans to set up a shipping SEZ. He declined to elaborate.

L&T plans to build the country’s biggest shipyard at Kattupalli in Tamil Nadu with an investment of over Rs2,000 crore, though it has not tied up all details of the project pending a decision on the subsidy. Naik had earlier said that he had discussed extending the scheme with India’s finance minister P. Chidambaram.

“We will set up the port-cum-shipyard as an SEZ at Kattupalli in Tamil Nadu," said an L&T official who did not want to be named. The company is currently negotiating with the Tamil Nadu government to acquire around 1,200 acres of land at Kattupalli for the facility. “Once this is finalized we will move a proposal to the Board of Approvals (a government body that approves SEZs) to set up the facility as an SEZ," said the same official.

Currently, shipbuilders pay a variety of taxes such as corporate tax, excise duty, sales tax, octroi, entry tax, fringe benefit tax, value added tax, dividend distribution tax and customs duty on parts and components. Typically, these taxes account for about 24-25% of the cost of building a new ship.

“An SEZ status would help shipbuilders avoid the burden of paying these taxes. It’s the biggest relief that we can hope to get," says Dhananjay Datar, chief financial officer of Mumbai-based ABG Shipyard Ltd, India’s biggest private sector shipbuilder.

ABG has initiated steps to merge its upcoming Rs950 crore facility at Dahej in Gujarat with a neighbouring SEZ. Dahej SEZ Ltd is promoted by Gujarat Industrial Development Corporation (GIDC) and the state-run oil prospecting company Oil and Natural Gas Corp. Ltd. Firms such as SKIL Infrastructure Ltd and the Adani Group have also decided to set up their proposed shipyards at Pipavav port and Mundra Port respectively as SEZs. Apart from financial and tax benefits, setting up shipbuilding facilities as an SEZ will speed up the administrative and operational procedures required to complete the project. “Besides, the labour laws in SEZ will be more beneficial to a business that is highly labour intensive," the L&T official said.

Shipbuilders are yet hoping that the government will continue with the subsidy. because they claim the business is not viable otherwise.

The subsidy meant that a company building a ship priced at Rs100 crore, would get Rs30 crore from the government. This subsidy is over and above the Rs100 crore that is paid by the company ordering the ship, including the builder’s profit margin.

The shipping ministry plans to approach the Union cabinet to extend the subsidy scheme.