The Hindu Business Line : Ship or vessel?

Confusion prevails in the shipping sector with a service tax notification making a needless difference between a `ship' and a `vessel'. But this is only one aspect that needs to be ironed out in the Budget.

FOR the Indian shipping industry, the forthcoming Union Budget will include issues that have more to do with the nuances of the English language than the usual arithmetic. For instance, one of the issues is whether there is any difference between a `ship' and a `vessel'. Mundane as it may sound, it has been the cause of much debate among ship-owners in the last few months.

The root of the argument on whether a ship and a vessel can be construed as the same lies in the issue of service tax. Although the shipping industry was exempted from service tax through a notification in the second half of 2005, the benefits granted were far less than the industry had sought. And, surprisingly, the exemption was restricted to "ships" and did not cover "vessels".

"There is no dispute that a ship and vessel mean the same, but the language of the notification, restricting the benefit of the exemption only to ships and not vessels, gave some room for the taxmen to raise tax demands. Surely, it is no big deal to change the scope of the notification, if the intention is there," a shipping industry representative said.

Further, the exemption was also restricted to services "availed of in the course of sailing of ships and handling of ships". This, again, gives scope to the taxmen to slap tax on services which the industry consumes outside India in the routine course of operation, such as general insurance services, manpower recruitment, management consultant's services, banking/financial services and technical testing services.

"It is clear that the Government has accepted the need to exempt the services received and consumed outside India by the industry, but the scope and language of the notification effectively dilutes the intent to exempt," the industry representative said.

The industry has pointed out that in the European Union, Singapore, Australia, the UK and other countries, services such as cargo handling, clearing and forwarding, general insurance, port services, repair and maintenance, storage and warehousing, steamer agent and survey are either exempted or zero-rated.

To make matters worse for the industry, the Director General of Central Excise Intelligence (DGCEI) is now in the process of raising demands retrospectively for the period August 16, 2002 to June 16, 2005 — the day when the exemption is supposed to have come into effect — in respect of services received outside India by Indian shipping companies. "This is shocking, as there was no specific language or provision conferring extra-territorial jurisdiction for the levy of Service Tax for the period. The proposed retrospective demands are totally in excess of jurisdiction as per the law and also as per one of CBEC's own circulars," a representative of the Indian National Shipowners Association (INSA) feels.

The industry is thus seeking an exemption from service tax in respect of services received and consumed outside India. "In the shipping business, ships have to move from country to country and are required to receive a slew of input services like port services, repairs, dry-coking and cargo handling, apart from routine loading/unloading services like steamer agent services. And, globally, such services are not subject to service tax," according to a shipping company official.

INSA is also hopeful that some of the difficulties faced in regard to implementation of tonnage tax will be ironed out in the Budget. For instance, the book profit on sale of ships is not bracketed under "shipping income" and, hence, has been kept outside the ambit of tonnage tax and under the stiffer income-tax.

"But the sale and purchase of ships are normal operations of a shipping company. The book profit on sale of ship reflects the present value of the profits likely to be generated over the balance economic life of the ship," the INSA representative pointed out.

Another issue that the industry has put forward in the run-up to the Budget pertains to withholding tax on charter-hire payments to foreign shipowners. "As in the airline industry, charter-hire payments in case of ships acquired under BBC and BBCD lease should be exempted," he said.

Other issues deal with the fringe benefit tax, seafarers' taxation and withholding tax on ECB loans. The industry is keeping its fingers crossed, hoping that the Budget gives shipping its due importance in the nation's economy.