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Shipping: Tonnage tax to the rescue - Views on News from Equitymaster
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  • Feb 23, 2001

    Shipping: Tonnage tax to the rescue

    This year has been a memorable one for shipping companies with freight rates touching its 20 year high levels. The resultant effect is apparent from the first nine months performance of Indian shipping behemoths like Great Eastern Shipping and Shipping Corporation of India. Net profits have gone up by more than 100% backed by a significant growth in operating margins. However, these companies have not been able to increase aggregate tonnage till now. What has been the dampener?

    Though shipping companies are one of the highest foreign exchange earners for India, these companies were unable to plough back their entire operating profits to augment fleet expansion plans. The reason being lack of fiscal incentives in the form of tax breaks, depreciation benefits and industry status. Finally, after lot of deliberations, the government is weighing the option of introducing tonnage tax. Tonnage tax is a fixed amount, which is calculated on the net weight tonnage of shipping companies. Basically, it is a tax on net tonnage and not on profit or loss, which the shipping companies have been paying till now.

    Straight to forex…
    (Rs m)* FY97 FY98 FY99 FY00
    Forex inflow 6,473 8,054 7,749 8,718
    Forex outflow 4,089 5,164 5,106 5,109
    Net forex 2,384 2,890 2,643 3,609
    * GE Shipping alone        

    If one were to consider the effective tax rate of Indian shipping companies vis-à-vis foreign carriers, there is a vast difference. Multinational companies hardly pay tax (their effective tax rate is just around 3%-4%). For GE Shipping, the effective tax rate has been on the rise for the last three years despite sluggish freight rates and declining realisations. This is precisely one of the reasons why the Indian shipping companies were not able to increase capacity till now (they enjoy tax incentives only on incremental capital expenditure). For a capital intensive business like shipping (tankers can cost between US$ 15 m to US$ 55 m depending upon tonnage and range), tax incentives are essential.

    The tax paradox…
    (Rs m)* FY97 FY98 FY99 FY00
    Net sales 7,929 8,811 9,290 9,146
    Profit before tax 1,614 1,657 1,656 784
    Tax 336 270 280 160
    Profit after tax 1,278 1,642 1,264 1,104
    GPM (%) 44.5% 38.3% 36.3% 31.5%
    Effective tax rate 20.8% 16.3% 16.9% 20.4%
    NPM (%) 16.1% 18.6% 13.6% 12.1%
    * GE Shipping alone        

    So, if the government were to introduce tonnage tax for shipping companies, it will boost net profit of shipping companies significantly. Assuming that tonnage tax is amended, we expect the effective tax rate for GE Shipping to drop to less than 6% in FY02 from 20% in FY00. This also would potentially increase net profit by around 7%-8%.

    These incentives, we believe, would enable shipping companies to plan their cash flows and fleet expansion programmes in a better way. If the IXth plan target of 9,000 gross registered tonnage is to be achieved, then it is high time for the finance ministry to bite the bullet.



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