Foreign Ships Kept Off Coastal Routes

The ministry of surface transport has outlined some measures to protect the domestic shipping industry, including curbs on foreign-owned vessels from plying on coastal routes.

Under the new National Shipping Policy, ships acquired through the bareboat-cum-demise method (with at least 51 per cent foreign equity) would not be allowed to operate on coastal routes and would be treated as foreign-owned vessels.

Official sources said only companies with at least 51 per cent domestic equity would be permitted to operate on coastal routes for the transport of bulk cargo, crude/ petroleum products and containers. As a result, the relaxation in cabotage laws (given earlier this year) would no longer be valid and coastal trade would be restricted to domestic flag vessels.

 

The bare boat-charter method of funding involves a structured lease, under which the shipowner relinquishes all rights over the vessel during the lease period and is transferred to the lessee at the end of the charter period.

A special purpose vehicle is set up to charter the vessel. The charter rentals are paid out either on a voyage basis or on a time-charter basis as lease rentals to the lessor, the parent company.

Several foreign shipping firms, especially tanker companies and container transporters, are resorting to such deals to take advantage of the domestic cargo-support mechanism. MoST has also made it clear that such vessels would not be eligible for cargo support. This is in line with both domestic and international cargo support policy, which gives preference to domestic shipping companies for the transport of import/export cargo.

At present, foreign shipping companies have set up domestic shell companies (with at least 51 per cent foreign equity) and usually fund the vessels through the bareboat charter-cum-demise method from the parent company, to operate on the coastal routes and also to avail of cargo preferences as domestic flag vessels.

The Government has also accepted the proposal to reduce manning scales for coastal vessels. This would be incorporated as an amendement in the Indian Merchant Shipping Act.

The sources, however, said the recommendations relating to changes in deprecation rates and reintroduction of section 33 A(C) are yet to be cleared by the Union finance ministry as these have vital tax implications.

According to the National Shipping Policy recommendations, depreciation rates should be be hiked to 40 per cent (from the current 20 per cent) on a written down value basis.

This is in accordance both with international practice and with the depreciation rates applicable for all other transport equipment.

Section 33A(C) of the Income Tax Act stipulates that any reserve created for the purchase of new vessels would be exempted from taxes.

The clause was removed in 1992-93 as part of the measure to increase tax flows to the government.