Cruise tourism: India falling behind, courtesy taxation

In the recent past, leading cruise liners have been targeting India as a prospective market and the Union government has been encouraging these cruise liners to increase their operations in India.

Cruise tourism: Get taxation right for Indian players
Cruise tourism: Get taxation right for Indian players
Cruise tourism: Get taxation right for Indian players
Cruise tourism: Get taxation right for Indian players

By Pankaj Bagri & Naman Shah

Cruise tourism is regarded as an integral part of the tourism industry of major coastal countries globally. With a coastline of more than 4,600 miles along with great heritage and culture, a diverse terrain and, a variety of flora and fauna, India has a great potential for the cruise-tourism sector.

However, cruise tourism in India is still less explored and mostly untapped due to various factors such as regulatory approvals, taxation, etc.

In the recent past, leading cruise liners have been targeting India as a prospective market and the Union government has been encouraging these cruise liners to increase their operations in India. However, due to a unfavourable regulatory and tax environment in the past, the growth of cruise industry hasn’t matched its potential so far.

Recognising cruise toursim’s potential (in terms of employment generation, economic revenue, etc) and to address the issues faced by cruise liners, the government of India has taken various steps in recent times to promote cruise tourism in India. The Indian government also appointed global consultants to set a roadmap for the development of cruise tourism in India, focusing primarily on the international best practices in relation to infrastructure development along with changes required in policy, regulatory environment and tax laws.

The ministry of shipping, in conjunction with other stakeholders, has taken various steps like development of cruise terminals, relaxation of port charges, relaxation of ship licensing requirements, etc. However, in addition, necessary tax reforms must be announced to ensure a level playing field for cruise operators from India compared to foreign operators. In this regard, it is relevant to note that in major port countries, cruise companies enjoy a tax holiday or their income is subject to a favourable tax regime. These tax benefits offered, in turn, have played an important role in the growth of cruise sector in those countries.

In India, foreign-based cruise liners, plying in India, are either not subject to tax in India in light of the Article 8 of the Double Taxation Avoidance Agreement or are subject to presumptive taxation under section 44B of the Income-tax Act, 1961 (‘the Act’) with an effective tax rate of around 3.3% on India-sourced income. Further, in many cases, the taxes paid in India are also available as a credit in their resident countries.

On the contrary, Indian companies operating cruise vessels in India are not eligible for favourable tax treatment under Section 44B of the Act. As regards the Indian tonnage tax provisions are concerned, a clarity is required that a cruise ship would be covered under the definition of ‘qualifying ship’, and not as a ‘pleasure craft’. An ambiguity in the definition of qualifying ships under the Indian Tonnage Tax Scheme could lead to tax litigation and, consequently, negatively impact the ease of doing business in India.

Further, it is relevant to note that apart from revenue from sale of tickets and on-board sale of goods and services, cruise companies earn revenue from a variety of activities like casino and gaming, shore excursions, entertainment shows, telecommunication services including internet facilities, gift shop items sales, photography services, spa/salon and fitness services, art auctions, renting of space for meetings/shops, etc. However, under the existing Indian tonnage tax provisions, there is no clarification whether these specific activities carried out by the cruise companies are covered under the ‘core activities’ of a tonnage tax company. Considering the fact that the aforesaid activities are integral part of the cruise tourism, it is important to clarify that income from such services forms part of core activities.

If a favourable tax regime (presumptive taxation or tonnage tax scheme) is not provided to Indian cruise operators, they will be liable to pay taxes at the normal corporate tax rate of 30% (plus surcharge andcess), which would make them unviable.

Another important aspect under the Indian tax regime is the applicability of Goods and Service Tax (GST) law to the cruise liners. Currently, leading global cruise liners are seeking exemptions from GST stating that cruise companies will face difficulty to operate in a country where they have to pay GST on the ticket price and on-board supplies and services, which form a major part of the total income of the cruise company. This shall have a negative impact on the cruise industry in India. Even imposition of GST on fuel oil used for cruise services substantially increases the cost of cruise companies since it is one of their major cost component.

Further, GST is a destination-based consumption tax, and it is relevant to note that goods procured by cruise companies at various ports are not consumed in the state where they are procured. Various types of goods such as fuel, furnace oil, spares, ship stores, etc, are delivered at various ports and at locations where the cruise companies may not have any place of business or office. Accordingly, input tax credit on such goods may be denied, resulting in significant blockage of input tax credit in various states.

Accordingly, considering the potential of Indian cruise industry and to achieve the growth targets set by the government, it is necessary to adequately address the issues listed here and bring in the necessary tax reforms. These reforms would not only boost the Indian cruise industry but also have positive impact on various allied businesses, inflow of foreign exchange, etc.

Bagri is partner, and Shah is manager, Deloitte Haskins & Sells LLP Views are personal

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