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Shipping: Balanced budget

Mar 5, 2001

Though the industry bigwigs from shipping companies were demanding everything right from infrastructure status, tonnage tax to an increase in depreciation rate, the budget failed to address the concerns of shipping companies.We analyse the proposals in the Budget and its implication on shipping companies:

  • Though dividend tax has been reduced from 22% last year (including surcharge) to 10.2% in the current year, shipping companies are not expected to benefit significantly. The Great Eastern Shipping Company (Gesco) will save only around Rs 61 m. The effective tax rate is expected to come down from 12.6% in FY01E to 11.4% in FY02. The Shipping Corporation of India (SCI) will save Rs 53 m in FY02 (the effective tax rate is expected to come down to 18.3% in FY02E from 20.2% in FY01E).
  • The budget has also imposed a five percent customs duty on import of cargo and cruiser vessels, which has dampened sentiment. Since most of the Indian shipping companies place orders for new ships abroad because of lack of capacity in Indian imports, we expect the average cost of acquisition to go up by more than 7%.
  • However, the reduction in corporate tax rate from 39.5% last year to 35.7%, reduction in lending rate and increase in depreciation to 25% should bring some respite to the shipping companies (It is still unclear as to why the shipping companies are not allowed an accelerated depreciation rate of 40%, which is the stipulated rate for other transportation companies). We have earlier projected Gesco to generate free cash flow of Rs 2,505 m in FY02, which we believe will go up by 8%-9% to Rs 2,700 m.

The industry would have benefited immensely if tonnage tax had been introduced apart from an increase in the depreciation rate to 40%. For a capital-intensive industry like shipping, tax incentives are the key. Only then, India as a whole would be able to achieve higher aggregate tonnage targets, which will place Indian shipping companies on a global scale.

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