Tonnage tax fails to net FDI in shipping

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After India introduced the tonnage tax regime which cut the tax incidence on investors in the shipping sector in 2004-05, the tonnage strength of India’s fleet rose sharply in comparison to the measly 7% growth recorded between 1992 and 2003. But in the last couple of years, no investments have come into the shipping sector despite the fact that the government has allowed 100% foreign direct investment (FDI).

“The fact is that the initial impact (of the tonnage tax regime) has tended to peter out and there have been no investments from foreign investors. This indicates that more needs to be done on the tax front,” a senior government official said.

The shipping industry believes that the key reason investors are not evincing interest in the sector is the way direct and indirect taxes have evolved since the introduction of the tonnage tax system. For instance, the number of services covered by service tax has gone up from 76 to 107, taking the effective service tax rate for the shipping business from 8% to 12.36%.

Now, after a high-level meeting on taxation issues in shipping attended by the ministries of finance and shipping as well as top Planning Commission officials, the Centre has decided to take a fresh look at the taxes affecting shipping, in the hope to revive investments. The meeting was held to follow up the recommendations made by the high level group on services sector, which had also pointed to taxation issues leading to the sector underperforming.

The finance ministry is expected to revisit several taxation issues including simplification of service tax, MAT on profit on sale of vessels, corporate income tax on interest, seafarers’ income tax—borne by employers, withholding tax on charter hire charges and withholding tax on interest on ECB.

It is also likely to take a re-look at the issue of benefits under tonnage tax being rendered ineffective by the increase in service tax, dividend distribution tax (DDT) and minimum alternate tax (MAT). The dividend distribution tax has gone up from 13.07% in 2004 to 17% in December 2007. The minimum alternate tax (MAT) rate has also increased from 7.84% to 11.33% in the same period. Moreover, the fringe benefit tax has also hit bottomlines.