Duty burden sees shipping firms hire foreign vessels

Indian shipping companies are hiring foreign vessels for transporting domestic cargo to avoid tax on ships manufactured abroad. They have to pay four per cent additional customs duty and one per cent countervailing duty, even if these vessels are registered in India.

Companies are hiring foreign vessels on a time-charter basis and sending their own ships on the foreign shores, since foreign vessels are not subject to any such taxation. “We are further pursuing the matter with the finance ministry. We are hopeful that the duty will be removed altogether,” said S Hajara, chairman, Shipping Corporation of India and president of the Indian National Shipowners’ Association (INSA).

The INSA has written to the ministries of finance and shipping, requesting for the waiver of additional customs duty. “On one hand we are trying to fight for cabotage and on the other, we ourselves have to hire foreign ships,” said Ajit Khot of Great Eastern Shipping Company. India's capacity in ship building, at 281000 dead weight tonnage, is still very limited. While ships that are classified as very large crude carriers (VLCC) are not made in India, Panamax vessels are mostly made only in Kochi.

Big shipyards are handling naval orders, making it difficult to deliver ships for commercial purposes on time. “The time taken for ship building is very long and also expensive in India, which is why we prefer to have them made abroad. A total of 90 per cent of Indian ships are made abroad,” said a senior executive of a shipping company. Several companies also prefer buying second-hand ships, since they are cheaper and are quickly available.

The Central Board of Excise and Customs (CBEC) clarified “the levy of CVD would not apply to such imports which are temporary in nature”. This means imported vessels, after the completion of their contracts, would return to international waters and engage in foreign trade.
 

TROUBLED WATERS
	As on March 31, 2010		As on March 31, 2011
	No of ships	Gross tonnage*	No of ships	Gross tonnage
Indian Flag Vessels	997	9283139	1071	10451897
* While 72 ships, accounting for gross tonnage of 331,695, were registered in India during 2009-10, 74      such ships, accounting for gross tonnage of 837063, were registered in 2010-11
*Number of ships scrapped in a year are not taken into account     Source: Indian National Shipowners Association
* Tonnage Tax WAS introduced in 2004-5 to make the Indian shipping industry globally competitive
* In Budget 2011, excise duty rate for ships and vessels has been increased from nil to 1 per cent (subject to the condition that no CENVAT credit would be available of the taxes paid on input and input services)
* 1% countervailing customs duty and 4 per cent additional custom duty on ships made outside India was levied in Budget 2011

According to shipping industry executives, the CBEC clarification is ambiguous, as there are vessels which are solely capable of being used in the coastal trade and would not be able to undertake foreign trade. “In the absence of a clear order, custom duty has to be paid by us anyway,” a shipping company executive said. Besides, there is no clarity on what is considered 'temporary'. “There are ships which have to stay for a long-term for instance ships used for oil and gas activity. It is not clear if they will be in temporary category or it applies only to ships which come for loading and unloading cargo,” said Heetesh Veera, tax partner, Ernst&Young.