New Delhi: Indian shipowners have been unable to expand their fleets, even in the wake of the modified tonnage tax scheme announced in July 2014 by Finance Minister Arun Jaitley in his maiden budget, thanks to ambiguity in the rules regarding licensing of ships by the maritime regulator, Director-General of Shipping (DGS).
The tonnage tax scheme was first introduced by the government from 2004 as a substitute for corporate tax. Indian owners were required to pay about 2% of their operating income by way of tax based on the tonnage of their fleet, rather than the corporate tax, which, with surcharges and cesses, worked out to nearly 34% in the highest income bracket.
This scheme was modified last July by Jaitley, who sought to allow Indian owners to acquire ships abroad and flag them in the country of their choice – typically tax-friendly jurisdictions, to help access cheap sources of funds – and yet get fiscal and cargo benefits available in India. Owners thus did not need to open multiple subsidiaries abroad for the acquisition and management of such vessels, merely to save on tax.
Local laws permit only Indian registered ships to operate along India’s coast for carrying cargo; foreign ships can be hired only when Indian ships are not available.
However, to qualify for tonnage tax benefits, ships have to be registered in India. Ships hired from overseas are also eligible for the benefits if they hold a licence issued by the DGS, under section 406 of the Merchant Shipping Act. This licensing requirement has become a major stumbling-block, as owners will only get tonnage tax benefits after obtaining a licence from the DGS.