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Shipping & ports: Seafarer tax anomaly set to go off

February 28, 2015 17:55 IST
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Shipping industry got some positive news in the Union Budget with removing the anomaly in computation of residential status of seafarer working in Indian ship and foreign ship. However, Shipping industry demand that treatment of book profit on sale of qualifying assets as 'core shipping income' and should be excluded from book profits while computing MAT liability has not been considered in Union Budget 2015-16.

Budget Provisions

  • To amend Income Tax Act to provide a uniform method of computation of period of stay in India for the purpose of determination of ‘resident status’ in the case of a India seafarer, whether working on Indian flagged ship or foreign flagged ship.  This amendment will take effect retrospectively from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
  • Service tax exemption to construction, erection, commissioning or installation of original works pertaining to a port is being withdrawn.
  • Transport of goods for export by road from the factory to a land customs station (LCS) is being exempted from service tax.
  • A uniform abatement is being prescribed for transport by rail, road and vessel to bring parity in these sectors. Service Tax shall be payable on 30% of the value of such service subject to a uniform condition of non-availment of Cenvat Credit on inputs, capital goods and input services. Presently, tax is payable on 30% of the value in case of rail transport, 25% in case of road transport and 40% in case of transport by vessels.
  • Major Ports will be encouraged, to corporatize, and become companies under the Companies Act.
  • Government will ready plug and play project, where all clearances and linkages will be in place before awarding in port sector for awarding. 

Industry Wish-list

  • Book profit on sale of qualifying assets should be treated as 'core shipping income' and should be excluded from book profits while computing MAT liability.
  • Income from deployment of statutory reserves (income generated through deployment of cash maintained as per statutory reserve for ship acquisition in short term investments till the time statutory reserve are utilized for acquisition of ships) should be treated as income from core activity of a tonnage tax company and should be subjected to tax accordingly.
  • Clarification and guidelines regarding Sec 172 of IT Act which prescribe for computation of profits of non-resident from occasional shipping business. 
  • The entry in the negative list should be suitably modified to expand the scope of negative list to cover shipping / import of LNG by way of chartering of ship from ship owners by LNG importer.

  • The services of ‘hiring of means of transport for a period up to one month’ in case of time charter services provided by an Indian shipping company to an overseas customer should be excluded from Rule 9 of the PPOS Rules.  As per Rule 9 of the PPOS Rules, for specified services including services of ‘hiring of means of transport, up to a period of one month’, the ‘place of provision of services’ is location of the service provider which overrules the Rule 3 of the PPO Rules which puts the place of provision of service is location of the service recipient as default.
  • Infrastructure status be granted to 'ships and other vessels' (as defined under the Merchant Shipping Act, 1958) as one of the steps to rationalize, strengthen and provide environment conducive to the growth of Indian shipping sector.  In-fact the Indian shipping industry fulfills the characteristics of infrastructure as mentioned in the harmonized Master List of infrastructure sub-sectors. Granting infrastructure status would mean reduced cost of borrowings to buy technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher employment and higher foreign exchange earnings/ savings.  The infrastructure status apart from making eligible for 10 years of tax holiday will also facilitated funds availability and other connected benefits.

  • Set up a 'shipping modernization fund' for growth of Indian flag shipping. Shipping, being capital intensive, requires huge funds for financing ship acquisitions depending upon the market conditions. Funds are mobilized largely through external commercial borrowings and internal generations. In the current depressed shipping scenario, it is uncertain as to how the shipping companies will be able to source the equity and debt requirement for acquisition of ships. As the shipping industry is in substantial need of funds for acquiring tonnage, it is essential that the Govt. of India set up a fund to support the national fleet, thereby enabling access to funds.
  • Manner of assessment of IT for seafarers should be done with small administrative changes. Period of stay outside India for an seafarers should be calculated on the basis of dates stamped on passport/ CDC. No of days should be lowered from current 182 days for calculation of non resident status in relation to taxation of salary income of sea-farers. 
  • Customs duty should be exempted on vessels used in international commercial transportation business.
  • Seafarer's tax should be abolished in-order to retain talent.

Analyst expectations

Greater possibility is for status quo to continue. 

Stock to watch

Shipping Corporation and Great Eastern Shipping.

Outlook

Currently 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. But according to tax rules framed in 1990, the time spent by a Indian ship in Indian territorial waters is considered as period of service in India. Contrarily, Indian crew serving on foreign ships for 182 days or more is treated as non-resident, irrespective of where the ship trades (including Indian waters). This put immense hardship on Indian shipping companies in retaining seafarer and now with that anomaly addressed is a positive for the sector. 

Currently barring Ennore port all major ports are trusts and thus the corporatization will facilitate them to leverage their assets and raise resource as well as bring in more accountability and better management. 

On the other hand the uniform service tax abatement prescribed for transport by rail, road and vessel compared to earlier differential rate of abatement is now expected to encourage the coastal shipping, which is already having a minor share in the domestic logistics market of the country. 

Similarly the withdrawal of service tax exemption so far accorded for construction, erection, commissioning or installation of original works pertaining to a port will increase the cost of projects which currently under implementation. 

Since the industry is under tonnage tax the change in corporate tax will have no major impact on the sector.

Budget 2015: Complete Coverage

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