Financial Daily from THE HINDU group of publications
Friday, Jul 09, 2004
Industry & Economy
Logistics - Shipping
Tonnage tax at last for a smooth sailing
New Delhi , July 8
THE tax burden of domestic ship owners will be drastically reduced as India on Thursday joined a long list of maritime nations that have embraced tonnage tax for their shipping companies with the Finance Minister, Mr P. Chidambaram, announcing the introduction of the new tax regime for the shipping industry in the Union Budget for 2004-05.
Simply put, tonnage tax means tax levied on the tonnage of shipping companies as against the normal corporate tax, which is based on the profits earned by them.
For the purpose of calculating tonnage tax, the shipping tonnage will be converted into a notional profit on which the prevailing corporate tax rate will be applied to arrive at the tonnage tax.
It will come into force on April 1, 2005 and apply in relation to assessment year 2005-06 and thereafter.
The Government has given a window period of three months - between October 1, 2004 and December 31, 2004 - for the shipping companies to opt for the new scheme by submitting an application to the Joint Commissioner concerned.
The method of calculation of tonnage tax will be based on a notional income schedule per day per net registered tonnes (NRT) of the ship fixed by the Government.
The income of each qualifying ship for the previous year will be computed by multiplying the daily income by the number of days in the previous year.
If the ship had been operated by the company for only a part of the previous year, the number of days in that part will be considered for calculation.
The aggregate of the income of all the qualifying ships operated by the company thus worked out will be the company's tonnage tax income for that previous year on which the prevailing corporate tax rates will be applied to arrive at the tonnage tax levy.
The tonnage tax liability of Indian ship owners will be in the region of 1-2 per cent to bring them on par with 85-90 per cent of global shipping tonnage that pays a nominal tonnage tax of less than two per cent.
Mr Chidambaram said that domestic ship owners could either opt for the new tonnage tax regime or stay within the existing corporate tax structure. But ship owners are left with no choice but to opt for the tonnage tax scheme as the Finance Minister announced that the Government would withdraw the tax benefits accorded to shipping companies under Section 33 AC.
"This is an indirect move to make the entire shipping sector migrate to the new tonnage tax," a top Shipping Ministry official said.
Under Section 33 AC, shipping companies could transfer an amount equivalent to twice the aggregate of the paid-up share capital, the general reserves and the share premium account to a reserve account (development rebate account) without paying any tax if the fund so set aside and built up is used exclusively for acquiring ships.
If Section 33 AC had continued, big names in the shipping industry might have preferred to stick to the normal corporate tax structure as the concessional regime under this Section would have brought down the eligible income for tax purposes, effectively reducing the tax rates to the minimum alternate tax (MAT) level of 7.5 per cent for many ship owners.
The tax rates will now be further reduced to 1-2 per cent with the introduction of tonnage tax, which is expected to spur shipping companies to augment the national tonnage, currently hovering at 7.42 million gross registered tonnage (GRT) as on June 30, 2004.
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