Smooth sailing

Updated: Feb 3 2006, 05:30am hrs
fe-ICRA SNAPSHOT

India has a coastline of 7,500 km with 12 major ports and over 150 minor and intermediate ports. The growth in the cargo handled at Indian ports has increased from 19.38 million tonne (major ports) in 1950-51 to around 463 million tonne (major and non-major ports) by 2003-04. The share of traffic at major and non-major ports stood around 345 million tonne and 118 million tonne, respectively in 2003-04.

India holds 17th rank among the world maritime nations in terms of gross registered tonnage (GRT) and 15th position in terms of DWT. The tonnage increased from 6.621 million GRT with 625 ships as on December 31, 2003 to 7.7 million GRT as on December 31, 2004 with 669 vessels.

The share of Indian shipping in the carriage of general cargo is about 5.09%, dry bulk cargo 7.06%, liquid bulk cargo 30.09%. The overall share of Indian ships in the total overseas trade was around 16.09 %.

Shipping can be divided into three segments: inland, coastal and overseas. A large proportion of Indian fleet tonnage is engaged in overseas operations. The industry has historically catered to only domestic shipping requirements, although private sector companies like Great Eastern Shipping Company and Essar Shipping are increasingly getting involved in international cross trade. Three companies accounted for over 65% of total Indian fleet tonnage as on December 31, 2004.

Demand for shipping is cyclical. Among the cyclical industries, shipping is characterised by the shortest buoyancy period and longest recessionary period.

Shipping freight rates are determined by the Baltic Freight Index (Biffex). It is the barometer of dry bulk segment.

Key Issues

The industry is capital intensive. The cost of acquiring new vessels is very high with new tankers costing anything between $35 million and over $1 billion depending upon size and specifications. Thus, shipping companies require large funds to modernise and expand their fleet. However, since shipping is cyclical in nature, capital is not readily available in India. As a result, most companies resort to external commercial borrowings (ECB). Here, ship-owners belonging to countries with a higher sovereign rating are in a much better position to get ECBs at finer rates. Higher borrowing cost directly affects the cost competitiveness of the shipping industry.

CEO Speak
The services availed of by ships and shipping companies are subject to tax in India. Input services are not taxed globally and render Indian flags uncompetitive. The government should consider exempting shipping companies from service tax.
Bharat Sheth

Deputy chairman and MD, GE Shipping
The average vessel size of an Indian fleet is much below international standards leading to higher transportation costs therefore lower competitiveness of the industry.

Indian ship owners are statutorily required to insure their fleet for hull and machinery with Indian insurance companies. The premium rates (fixed by the tariff advisory committee) have traditionally been higher.

Tax Structure

Budget 2004-05 introduced tonnage tax, which lowered the incidence of taxation for shipping companies. Under this regime, companies are required to pay a flat rate of income tax on net tonnage unlike the earlier practice of corporate tax rate of 35%. Under the earlier practice, these companies had exemptions under Section 33 AC of the Income-Tax Act, which was done away with in 2005-06.

RUN-UP TO BUDGET

INDUSTRY WISHLIST
INSA
ISBA

Exempt all services - availed domestically or internationally - provided to the shipping industry from the purview of service tax
Exempt the industry from the purview of FBT, in line with the tax practices followed by
other major maritime nations
Exempt charter hire payment in case of ships acquired under lease arrangements as in the case of airlines
Restore the exemption on withholding tax on remittances of interest on external commercial borrowings

Abolish the 10.2% service tax, which ship builders have been paying since 2003
Spare customs duty on equipment and other tools. At present, the total incidence of duty is 33%
Allocate more funds to the industry, as it is normally not adequately highlighted as an economic activity
Promote shipbuilding as a lucrative career option, as it would attract more jobs