Shipping industry is going through a cyclical downturn. The shipping freight rates especially that of dry bulker has seen a free fall from its historic peak in May 20, 2008 to its low since April 1986. The freight rater though have recovered marginally is still lower on year on year basis thus continue to put the industry on hardship.
Lower freight rates though have led to sharp correction in asset prices offering great opportunity for the domestic shipping industry to ramp up their capacity, the industry could not capitalize on that due to current credit market conditions.
On the back of global economic recession, the overseas funds were hard to come or come with stringent norms/ high cost at the same time there is also no lending institution singly focused to the needs of the shipping industry. This makes hard for the industry to raise funds for the acquisition of vessels.
Industry expectations
Separate fund for shipping with a war chest of Rs 10000 crore so as to help domestic shipping industry in acquiring ships. Even though the industry has an estimated requirement of $20 billion spread over a period of next five years the war chest of Rs 10000 crore is immediately required so as to finance acquisition of ships by the domestic industry.
Permitting shipping industry to prepay the existing ECB loans even before the average maturity period of the loan is completed. Prepayment of ECB loans before the average maturity period is not permitted under current ECB guidelines.
Permit refinancing of the existing ECB loans at a rate higher than the rate at which the loans were originally contracted so long as revised rate of spread over LIBOR is not more than the spread permissible under the current guidelines. If the shipping companies want to increase the tenure of the loan the lending institutions normally asks for current high interest rates and hence the companies could not restructure their loans under current trying circumstance of lower cash flow.
Book profit on sales of vessels should be treated as arising from core activities of a tonnage tax company thus paving for abolition of current applicability of MAT.
Interest income from compulsory reserves should not be subjected to corporate income tax and may be treated as arising from core activity of a tonnage tax company.
Manner of assessment of IT for seafarers should be done with small administrative changes. Period of stay outside India for seafarers should be calculated on the basis of dates stamped on passport/ CDC. No of days should be lowered from current 182 days for calculation of non-resident status in relation to taxation of salary income of seafarers.
As about 75-80% of the funds of acquisition of ships are from foreign lending, the exemption from withholding tax on remittances of interest on ECB loans or interest paid to foreign lenders, which was withdrawn earlier, should be restored back.
Service tax on input services availed by the shipping industry should be zero-rated. Some of the input services for which zero rate is required are such as 1) Brokerage, Commission & Finance Charges 2) General Insurance services including P&I insurance 3) Ship management services and 4) manpower recruitment and supply agent services.
Exclude transaction of transportation and carriage of goods by sea (e.g. Time charter transactions) from the purview of 'Supply of Tangible Goods for Use Service' U/s 65 (105) (ZZZZ) of the Finance Act 1994.
No customs duty/ other levies on bunkers consumed by coastal ships.
Ship-owners may be permitted to import spares and repair equipment directly for carrying out repairs in India without subject to payment of customs duty as in case of ship repair units.
Analyst expectations
The last three Union Budgets offered nothing significant for the Indian shipping sector, and the ensuing budget is going to be no different. But if the industry gets the Shipping Fund as it wished, it would facilitate expansion of tonnage under Indian flag.
Cut in service tax as expected by the industry will add cream if materialized.
Stock to watch
Shipping Corporation, Great Eastern Shipping.
Outlook
Fortunes of shipping industry being linked to global trade, the frutification of shipping fund or tax measures will enable the industry to build its arsenal and attack in equal terms with its global peers once the global trade picks up.
