Two significant developments recently brought cheer to Indian shipping.
On 7 October, India’s finance ministry broadened an exemption granted in November 2014 to Indian-registered ships carrying a mix of export-import goods and empty containers along the coast from payment of customs and excise duty on bunker (ship fuel) to include such vessels transporting domestic containers also.
Two days later, organizations representing the global shipping and oil industry reduced the size of a so-called high risk area for piracy in the Indian Ocean to 65 degrees east longitude from the earlier 78 degrees east longitude, following intense lobbying by India. This will result in huge savings for India’s export-import trade and consumers on account of reduced insurance premium paid by ship owners and consequent reduction in freight rates.
The high risk area was expanded to 900 miles east in December 2011 to cover almost all of the country’s west coast (as close as 35 nautical miles from the coast), as the hijacking range of Somali pirates grew, triggering a 300% jump in ship insurance costs, in turn raising the transaction cost of commodities to Indian ports.
It is debatable whether the first development will help promote a modal shift of cargo from roads to coastal shipping immediately because the landed cost of diesel used by trucks has also come down and road transporters, the main rival of coastal shipping, are in a position to pass on the reduced cost to customers. India’s coastal ship operators could find it difficult to wean trade away from road transporters, which have an inherent door-to-door advantage. The first and last-mile connectivity would pose a challenge to coastal shipping which may appeal to customers located near port cities.
Bunkers account for some 40% of the operating costs of Indian ships. By removing the duty on bunkers, the operating costs of ships is reduced significantly. This, by itself, may not nudge coastal ship operators to reduce the freight costs, given their current wafer-thin operating margins.
Still, no doubt, duty-free bunkers to Indian ships carrying a mix of export-import goods, empty and domestic containers can act as a catalyst to promote India’s nascent coastal shipping sector. But more than that, it has brought parity between Indian and foreign-registered vessels that already enjoy duty-free bunkers.
This is the second recent instance of India seeking to create a level playing field for its ships compared with foreign ships. In August, the government notified new rules for computing the non-resident status of Indian seafarers working on Indian-flag ships.
The period of stay of seafarers outside India will be calculated from the date stamped on their continuous discharge certificate (CDC)—a seafarer’s identity document—at the time of joining the ship for the voyage till the date entered in the CDC at the time of signing off. As a result, the period spent by a ship in Indian coastal waters is also taken into account for computing the non-resident status to be eligible for the tax-free benefit.
A seafarer serving on Indian ships outside India for a period of 182 days or more in a year is considered to be a non-resident. However, the time spent by a ship in Indian territorial waters is considered as period of service in India, according to tax rules framed in 1990. Hence, the number of days outside India of Indian crew working on such Indian ships got counted only from the date when the vessel crossed the country’s coastal boundaries. This led to difficulties in complying with the 182-day criteria for getting a non-resident Indian status.
However, Indian crew serving on foreign ships for 182 days or more are treated as non-resident, irrespective of where the ship trades (including Indian waters). As a result, Indian crew preferred to work on foreign ships, creating a huge shortage of qualified personnel to man Indian ships.
India introduced a new tax from 2004 for its shipping industry based on the cargo carrying capacity of ships—a regime in which about 95% of the global fleet operates.
The tonnage tax cut the tax incidence of Indian shipping firms to just 1-2% of their income compared with the corporate tax rate of 33.9%.
Despite the introduction of tonnage tax, Indian ship owners argue that they are by law required to pay a dozen extra taxes in India, which foreign ship owners do not, thus neutralizing the benefits of tonnage tax.
While most components of the costs of a ship are international, the taxation and overheads or management costs in India impact the competitive ability of Indian shipping firms both in international as well as domestic/coastal trade.
The operating costs of an Indian-flagged vessel is around 35-40% higher than foreign-flagged vessels, primarily due to the strict fiscal regime governing Indian shipping.
Even if a ship flagged in India was to follow some of the best market practices in systems and operations to keep costs under control, the taxes would make operations difficult. Despite the tonnage tax, the average tax rate paid as a percentage of profit is much higher in the case of an Indian firm compared with a company operating in Singapore. The current average tax rate of an Indian firm is 9.73%, whereas for a firm listed under Singapore’s tax regime, it is 2.19%.
No wonder then that none of the foreign global ship owners have set up shop in India although 100% foreign direct investment is allowed in the Indian shipping sector. The recent removal of some of the fiscal restrictions has the potential to change the outlook towards owning Indian ships.
