To beat tight taxes, shipowners sail to safer shores
September, 04th 2006
The strategy of the Indian shipping industry would be to flag out all ships except coastal vessels under foreign flags, if the situation continues.
It is no longer a hollow threat. Indian shipowners have slowly started migrating to safer shores to beat the tight tax laws and shrinking cargo support in the country. While Tolani Shipping has flagged out four of its eight bulk carriers (Handymaxes) to its Singapore subsidiary, Varun Shipping and Mercator Lines are operating ships acquired through their Singapore subsidiaries to lighten the burden by taking advantage of the liberal tax regime and significantly lower operating costs, such as duty-free bunkers and spares available there.
Essar has set up a holding company Essar Shipping and Logistics Ltd in tax-friendly Cyprus to oversee the operations of Essar Shipping Ltd, Essar Logistics Ltd and Vadinar Oil Terminal Ltd. ESLL will hold 77 per cent equity in Essar Shipping and 100 per cent stake in the other two firms.
Operating from tax havens
Great Eastern Shipping also has a subsidiary in Singapore that was opened primarily to undertake agency business for its vessels visiting the South-East Asian nations and to be present in the big maritime market there. Currently, it does not own or operate ships under the Singapore flag.
Essar and Great Eastern are, thus, ready with plans to operate from tax havens if "conditions became too difficult" in India, though officially they deny this for now. The move came barely two years after the Centre introduced tonnage tax in 2004.
The tonnage tax regime was introduced to help Indian owners compete globally on a level-playing field since more than 90 per cent of the global shipping tonnage operate under this system of taxation where the tax levels are a meagre 1-2 per cent compared to the steep rates prevailing under the corporate tax structure.
Though the tonnage tax has benefited them immensely in terms of lower tax outgo, the owners now feel that flying the Indian flag is still not attractive and competitive since they are saddled with 12-13 other taxes including withholding tax on interest on external commercial borrowings (ECBs) and on charter hire paid to foreign shipowners, capital gains tax, service tax, fringe benefit tax, sea farers tax and dividend distribution tax, among others. "Tonnage tax has helped a lot," admits Mr Sanjay Mehta, Managing Director, Essar Shipping Ltd. He, however, said that issues relating to capital gains tax and service tax have not been resolved yet. "When an owner sells a ship for a market value that is much higher than its book value, the difference is treated as capital gains and subjected to tax as it is not covered under the tonnage tax law.
But nowhere in the world is there a capital gains tax on the shipping industry. The only way to escape this is to buy ships with the capital gains that accrue and that too in the same fiscal year. But this does not make sense because of the high ship prices ruling at the time," he explained. The industry is also reeling under the service tax and fringe benefit tax imposed on them by the Government.
"We put a lot of effort into training and once that is over, he joins a foreign flag vessel," an industry official averred. The high crewing costs and acute shortage of officers have only added to their woes. Shortly after the tonnage tax was introduced, the Centre gave a big jolt to the shipping industry by allowing India's largest refiner, Indian Oil Corporation (IOC) to make its own shipping arrangements for importing crude without mandatorily going through Transchart. The Cabinet also gave LNG importers the flexibility to bring the cargo either on f.o.b (free on board) or on cost insurance freight (c.i.f) basis by deploying foreign or Indian flag vessels. Based on the IOC experience, the Petroleum Ministry has now piloted a Cabinet note seeking similar freedom for HPCL and BPCL in transporting their crude, bypassing Transchart. Given the trend, the industry fears that it will not be long before such freedom is granted to more PSUs, rendering redundant both Transchart as well as the "buy f.o.b policy" designed to provide cargo support to Indian shipping.
With cargo support drying up and a slew of taxes being imposed, shipowners have started flagging out or operating ships under tax-friendly registries, mainly Singapore. Mr Mehta said that the freedom granted to oil refiners to make their own chartering arrangements would require domestic shipowners to become more efficient with the capability to quote lower rates and compete with foreign flag vessels to win the deal.
"Everything else being equal, Indian owners can compete with their global counterparts. But, otherwise, if they want us to be competitive and match the rates quoted by foreign flag vessels, we have to become more efficient in terms of taxation," he stated.
Despite setting up a holding company in Cyprus, Mr Mehta said that Essar had no intentions to flag out its ships in view of the "opportunity that India presented". Essar Shipping would, however, benefit from a lighter tax regime in Cyprus and also take advantage of the Double Taxation Avoidance Treaty signed by India and Cyprus while repatriating dividend when it starts operating from that country. Great Eastern said that a decision to flag out should be looked at from a larger perspective. "At present, Great Eastern Shipping has no plans to flag out ships. We believe that the decision to flag out should not be taken in isolation only on the basis of prevailing taxation. Many other factors such as commercial, legal and financial aspects needs to be considered before taking such a decision," Mr Rajat Dutta, General Manager, Great Eastern stated.
Loss for India
India has also lost out precious tonnage due to sharp differences within the industry body, the Indian National Shipowners' Association (INSA). This came to the fore when Mercator sought permission from the Director-General of Shipping last year to in-charter nine Panamax vessels (with options to buy four of them) to fulfil its contractual commitments.
The permission was denied by the DG (Shipping) after INSA protested and refused to give a no-objection certificate (NOC) to Mercator.
Subsequently, Mercator opened a Singapore subsidiary to in-charter the vessels and has even exercised the option to buy one vessel which it will operate under the Singapore flag with the remaining three to follow soon.
Mercator was, thus, forced to flag out. Sources reckon that the strategy of Indian shipping industry would be to flag out all ships except coastal vessels under foreign flags, if the situation continued.
"There is a limit to which you can push the administration to realise your demands. Beyond that, it becomes difficult. Then, nobody can stop us from flagging out. The owners will only keep coastal vessels under the Indian flag since there is a cargo preference as coastal trade is restricted to Indian flag vessels under cabotage laws," an industry official said. But, even in this case, foreign vessels can be deployed with the permission of the maritime regulator.