In fact, the gap has been narrowed down roughly to 3.5-4 per cent from 7.4 per cent. Though the exact figures could not be ascertained, industry sources state that the gap of $1,591 per day would be cut to around $600-800 per day for a new build Aframax tanker.
According to a TERI report on shipping, the difference in marginally higher breakeven for a vessel under the Indian flag is attributed to the increased insurance costs, the withholding tax on external commerical borrowings (ECBs) and corporate tax, among others.
While the impact of corporate tax has now been nullifed with the introduction of Section 33 AC for the Indian shipping industry, the high insurance cost and the withholding tax continue to hound the shipping industry.
Insurance premium rates for hull and machinery in India have traditionally been higher than those prevailing internationally, the report states.
Citing an example discussed in the report of the working group on shipping for the tenth five-year Plan, the recently released TERI report on shipping states that a new build Aframax tanker at $42.50 million would require an average breakeven time charter earnings of $23,095 per day. This would be higher by $1,591 per day as compared with foreign ships attributed to the above mentioned costs prevailing in India.
However, this difference is arrived after calculating the corporate tax at 22 per cent on return on equity (ROE) which has now been reduced to effective 7.5 per cent under MAT (minimum alternative tax) in the last budget. As a result, the required pre-tax ROE works out to 12.9 per cent instead of the erstwhile 14.64 per cent, industry sources said. The example assumes that the vessels have the same Libor interest rates with similar spreads, a loan tenor of eight years and a residual value of $20 mn. It also assumes 350 days of operation during the year and fixed operating cost per day of $6,000 for both the vessels.
The removal of withholding tax on ECBs and introduction of tonnage tax along with insurance premium as per global rates would enable the Indian shipping industry compete in the global market. The need of the hour is not to provide sops or financial support, but to create a level playing field for the Indian shipping indsutry, the report stated.