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Tonnage tax regime - a shot in the arm for shipping sector

Amit Mitra

Mumbai , Feb. 3

EUPHORIA surged through the Indian shipping industry with the introduction of the long-proposed tonnage tax in the interim Budget for part of 2004-05 presented by the Union Finance Minister, Mr Jaswant Singh, on Tuesday.

The shipping companies, which are having a bull run with swelling profits in the wake of a dream boom in the freight market, are understandably excited about the announcement, as a tonnage tax regime will significantly bring down tax burden and further sharpen profitability.

Although the quantum of reduction in tax burden will be clear only after the details of the scheme is worked out, it is expected that the level of taxation under the new regime will drop to 2-3 per cent, as against the pre-2002 rate of about 22 per cent and post-2002 rate of 7.5 per cent.

Apart from encouraging FDI in the shipping sector, a tonnage tax regime is also expected to shore up the country's fleet strength, which fell from 11.20 million DWT as on March 31 20-02 to 10.06 million DWT as on March 31 2003.

However, due to the freight market boom, since April last year the fleet strength has been showing signs of recovery, crawling up to 10.51 million DWT by July-end.

How will a tonnage tax regime help bolster the bottom lines of the shipping companies? Currently, shipping companies are subject to a corporate tax of 35 per cent, with the effective rate of taxation working out to around 22 per cent.

However from 2002-03, with the benefits under Section 33 AC of the Income-Tax Act, 1961 the effective rate of taxation has been about 7.5 per cent, which is still considered amongst the highest in the world.

Under the tonnage tax regime, it has been proposed that a shipping company's tax liability will be determined by the tonnage of its fleet rather than the profits generated by its commercial operations.

The Rakesh Mohan Committee report, which is considered the basis for working out the contours of the new tax system, has recommended a system in which the tonnage tax is obtained by multiplying the net registered tonnage (NRT) of a vessel with a prescribed notional income rate to compute a notional daily taxable income.

This value is then multiplied by the prevailing corporate tax rate (35.7 per cent) and the number of days the ship operates in a year to yield the actual tax liability.

For arriving at a common notional income rate, the committee has used a weighted average notional income rate of three countries that have implemented such a system, namely the UK, Germany and the Netherlands.

The notional profit schedule per day per NRT worked out by the committee is Rs 40 for ships up to 1,000 NRT, Rs 30 for ships of 1,000-10,000 NRT, Rs 25 for ships of 10,000-25,000 NRT and Rs 15 for ships above 25,000 NRT.

What will be the impact of introduction of tonnage tax vis--vis the existing taxation system for the overall industry?

The corporate tax paid by the entire industry had increased from Rs 114.2 crore in 1996-97 to Rs 122.4 crore in 1997-98 and Rs 274.7 crore in 2000-01.

The tax liability, however, came down in 2002-03 after the benefit under Section 33 AC to about Rs 54 crore, when it was calculated after multiplying the annual profit of the industry with only 7.5 per cent.

Based on the current trend in reduction of total tonnage, a study by Tata Energy Research Institute (TERI) has calculated that the corporate tax liability for the entire industry would go down from Rs 54 crore in 2003 to Rs 45.3 crore in 2007 (on a tonnage of 6.84 GRT), Rs 40.6 crore in 2016 (5.04 million GRT) and Rs 38.8 crore in 2027 (4.82 million GRT) due to reduction in tonnage as a result of the high taxation.

For calculation of tonnage tax, the Rakesh Mohan Committee report can be used as a basis.

For example, for 45,000 GRT, the daily notional income (weighted average tax rates of three countries) is 107.30, which means that the notional annual income would be 39,164.50 (107.30 x 365 days).

Thus, the tonnage tax for the ship would be 13.981.7, or Rs 9.64 lakh at the then conversion rate of Rs 69 (PS 39,164.50 x 35.7 per cent which is the corporate tax rate on deemed profits).

Using this assessment, the industry's tax liability under the tonnage tax regime has been projected to be Rs 15.2 crore in 2007, Rs 15.7 crore in 2016 and Rs 19.1 crore in 2027.

Thus, the liability is significantly lower than the projected tax liability under the corporate tax regime.

Mr Sanjay Mehta, Managing Director of Essar Shipping, said: "On the other hand, the tonnage tax regime will make Indian shipping companies internationally competitive and will attract more investments for the industry."

However, with the decrease in tax liability, the tonnage is expected to go up, as ship owners will be encouraged to make more investments for fleet acquisition.

TERI has estimated that for every additional million GRT added after introduction of tonnage tax, about Rs 2.4 crore of additional tax will come to the Government every year.

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