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Ministry to seek Cabinet nod for tonnage-based tax for shipping

P. Manoj

NEW DELHI, June 23

THE Ministry of Surface Transport will soon seek an in-principle approval of the Union Cabinet for introducing a tonnage-based system of calculating tax for the Indian shipping industry.

The proposal envisages taxing shipping companies on the basis of their tonnage in lieu of the corporation tax and minimum alternate tax (MAT) which are in vogue now, Government sources told Business Line.

``The tonnage-based tax, which is an entirely new concept of levying tax, will mark a significant shift in the taxation system for the domestic shipping industry'', the sources said.

A tonnage-based tax treatment for the shipping industry is now prevalent in some of the European countries such as the United Kingdom, the Netherlands, Norway as well as South Korea.

The Ministry of Surface Transport will first seek an in-principle approval of the Union Cabinet on the tonnage tax system after consulting the Ministry of Finance on the issue. The finer details of the tonnage tax system will be worked out after obtainin g the Cabinet's approval in this regard.

According to the proposal, the shipping companies will have to pay tax at a flat rate on the basis of their tonnage and not on the actual profits earned by them. The tonnage-based tax is based on the premise that the shipping companies will increase thei r tonnage when they are doing well by acquiring vessels.

``So, there is a direct link between profits and tonnage acquisition which the Government proposes to facilitate through a low-tax regime for the domestic industry'', the sources said.

The domestic industry has often complained that they are required to pay the corporation tax of over 20 per cent and MAT even when the shipping market is depressed, thereby affecting their ship acquisition plans.

The sources said that the Income-Tax Act will have to be amended to make way for the introduction of the new system of calculating tax for the shipping companies.

The suggestion to introduce a tonnage tax system for the domestic shipping industry was made by the Ministry of Surface Transport at a meeting of the Committee of Secretaries (CoS) headed by the Cabinet Secretary, Mr. Prabhat Kumar, on December 3, 1999.

The Transport Ministry's suggestion to introduce a tonnage-based tax system came in the wake of relentless opposition from the Finance Ministry on granting tax sops to the domestic shipping industry in line with the recommendations of the new national sh ipping policy drafted by the M.P. Pinto committee.

The CoS was of the view that the Transport Ministry should formulate a proposal in this regard after consulting various interest groups. The tonnage tax proposal was discussed at a meeting on June 2 which was attended by representatives from the Ministry and the Indian National Shipowners Association (INSA).

The tonnage tax proposal has also assumed importance in view of the proposed LNG shipping policy. In the absence of tax incentives for the highly capital-intensive LNG shipping sector in the country, the LNG vessel owners and operators would prefer to re gister their vessels in tax-haven countries to take advantage of the tax sops available there.

For instance, Petronet LNG Ltd has allowed the foreign owners and operators selected by the company for transporting its LNG cargo from Qatar to register the LNG vessel initially as a foreign flag vessel.

However, Petronet LNG has stipulated that the vessel flag should be converted from foreign to Indian within one year of notifying the policy on tax treatment of LNG vessels.

``The time is thus ripe for seeking an in-principle approval for a tonnage-based tax scheme for the domestic shipping industry. The nitty gritties of the new tax regime will be worked out thereafter by an expert group '', the sources said.