Indian shipping firms have sought exemption from service tax on input services in the federal interim budget 2009 to be presented on Feb. 16.

Indian shippers pay a service tax of 12.36 percent for some 27 services including ship management, manpower recruitment, brokerage, which firms overseas do not pay, trade body Indian National Shipowners' Association (INSA) said.

Indian container operators providing services on time-charter pay a similar service tax of 12.36 percent, which their foreign counterparts do not pay.

"On an average, the effective tax on Indian companies is 3-4 percent more compared to the foreign ones. This is an inherent handicap for Indian companies - this tax," S.S. Kulkarni, secretary general of INSA, said.

Higher taxes skew the playing field for local companies against foreign shipping firms, who do not have to pay any tax for shipping cargoes, hurting profitability, Kulkarni said.

"The shipping industry operates on a global level. We are only asking the government to make it equally competent for us. There is 100 percent FDI for shipping in India, then why don't foreign lines flag ships from here?" Kulkarni added.

India's Mercator Lines Ltd (MRCT.BO: Quote, Profile, Research), which has diversified into mining recently, floated a subsidiary in Singapore in 2007, due to favourable tax regime there, analysts said.

Interestingly, other Indian firms are doing the same as buying a vessel from Singapore is cheaper due to a string of taxation issues, they added.

"If you have to compete in the international market, you have to operate the way your competitor does. If they do not pay taxes, why should you?" an analyst from a foreign brokerage, who could not be identified, said.