Recent changes in the regime governing the Indian shipping industry

INDIA is one of the oldest seafaring nations and historically has had a large and vital shipping industry. Its shipping fleet occupies a place of importance in India's overseas trade and is currently the 14th largest fleet in the world in terms of deadweight tonnage.

Since India attained independence in 1947 there has been a growth in national shipping but, owing to a variety of policy constraints, development of the sector has not been as robust as it could have been. The Indian taxation and regulatory regimes applicable to the shipping industry did not compare well with those of many other countries. But there have been several legislative and policy changes recently that have improved the situation. And there is reason to believe that the sector will emerge from its shackles as further changes are gradually introduced.

The process of liberalisation of the Indian economy was set in motion in 1991 and has been stepped up progressively. Shipping companies may now be 100 per cent owned by foreign investors and, ordinarily, no approval is required from the Indian regulators for such an investment. The exception to this is where the foreign investor already has a tie- up in the same or an allied field, in which case specific approval of the Foreign Investment Promotion Board would be required.

In addition, the External Commercial Borrowing (ECB) laws have been periodically made less stringent, to facilitate easy access by Indian companies to funds from foreign lending institutions. Shipping companies which have foreign exchange earnings are permitted to raise ECB of up to three times the average amount of annual exports during the previous three years subject to a maximum of US$ 200 million. Corporate borrowers are permitted to raise ECB to acquire vessels from Indian shipyards.

Another favourable development for lenders to shipping companies is a recent change in the procedure for both the registration of ships and the registration of mortgages for ships. Earlier, the procedure for registration was mired in formalities, which caused delays in the registration of ships as well as in recording mortgages. This made for inconvenience to both owners and the lenders, and was a source of considerable dissatisfaction for the shipping industry. Recent guidelines in this regard issued by the Director General of Shipping are an attempt to simplify the procedure.

In addition, shipping companies have been specifically permitted to freely open, hold and maintain accounts abroad for the purpose of their business, and no approval from any Indian regulatory authority is required for this purpose.

As part of the process of liberalisation, import policy has also undergone some significant changes. Licensing restrictions were an impediment to ship acquisition, which was posing a serious problem to the shipping industry. Recent changes have removed all procedural hurdles in the way of fleet acquisition.

Earlier, the import of several categories of vessels, including launches, boats, barges, trawlers and other fishing vessels, as well as the import of all secondhand vessels, required a licence from the Director General of Foreign Trade. The new regime allows importation of all categories of ships, boats and floating structures without a licence, the only restriction being on the import of warships.

Further, the import of all types of secondhand ships has been liberalised so that such vessels may now be imported without any licence or permission, subject to conformity with certain norms that have been prescribed by the Director General of Shipping. Technical clearance from the Ministry of Shipping is only required for the import of secondhand vessels if they are above twenty-five years of age. All restrictions on the price at which vessels may be imported have now been removed and shipping companies are free to enter into deals as they deem fit.

These changes in the ship acquisition laws are intended to give a boost to tonnage growth and to provide a broader role for the Indian fleet in overseas trade, producing greater foreign exchange earnings for India and a boost to the economy.

Taxation plays a significant role in determining the level of investment, and a burdensome tax regime is a disincentive to investment. The taxation system in India applicable to the shipping industry compares unfavourably with the global standard, and shipping companies are taxed at fairly high corporate rates. But income tax laws grant public Indian shipping companies a tax holiday on profits, subject to certain caps, provided such profits were moved to a reserve account and were used for acquiring new ships or till such acquisition for the purpose of the business of shipping, if such amounts were retained in India. In 2002, the applicable caps were increased but the tax holiday is currently expected to be reduced after April, 2006.

There has been a concerted effort by the shipping lobby to introduce a tonnage tax scheme to India, such as that which operates in a number of other maritime nations, so as to place Indian shipping companies in a position of comparative parity with companies abroad. Tonnage tax calculated on gross registered tonnage would be much lower than the present corporate tax rate applicable to shipping companies.

Currently, on account of the unfavourable tax regime, a large number of shipping companies register their ships through subsidiaries in open registry nations which are tax havens. It is expected that the introduction of tonnage tax would result in growth of the Indian fleet, thereby compensating the government for any revenue shortfall arising from the change.

The introduction of tonnage tax in India was recommended by the Rakesh Mohan Committee. No steps have been taken in this regard, but hopes remain high that they will be shortly.

Additionally, a national shipping policy is in the process of being formulated and will encompass fiscal, financial, administrative and legislative measures for the development of the shipping sector. It is hoped that the new policy will address some of the issues currently plaguing the shipping sector and result in a growth-oriented legal, fiscal and regulatory regime comparable to other international regimes. When that happens, the Indian shipping industry will be in a position to compete internationally.