The objective of imposing a tonnage tax instead of corporate tax on the Indian shipping industry may have been lost. A host of new taxes including fringe benefit tax (FBT) and service tax have increased the tax payouts of shipping companies diluting the benefits of shifting from a corporate tax regime to a tonnage tax regime.

Under the tonnage tax system, shipping companies pay a 3% tax on book profits as opposed to the earlier system of a 33% corporate tax.

The shipping ministry has asked the finance ministry to reduce service tax and FBT. It has also asked the ministry to withdraw the corporate tax on tonnage tax reserve a fund mandated by the government for fleet expansion and modernisation.

Even though the industry is supposed to pay 3% tonnage tax, it lands up paying 9% tax due to FBT and service tax which contribute additional 5-6%.

The government had introduced tonnage tax in India in 2004 in line with international practices replacing the corporate tax structure and reducing the tax liability of the industry.

However, it had made it mandatory for the industry to pool in 20% of its book profits towards a reserve for fleet expansion and modernisation called the tonnage tax reserve. The industry wants that there should not be any corporate tax on this contribution.

One major drawback of this is that even in loss making years, the industry has to make a set contribution to the fund, a shipping analyst said.

In other words the very purpose of introducing tonnage tax for giving Indian shipping companies a level playing field seems to have been defeated. Even tonnage tax in India is higher at 3% vis--vis 1-2% across the globe.

In addition, the government charges a minimum alternate tax (MAT) on profit from sale of ships. Since buying and selling of ships is an integral part of the business, the industry has been pleading for treating this income as part of tonnage tax income and therefore paying tonnage tax.