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Shipping: Lack of reforms subdues growth - Views on News from Equitymaster
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  • Dec 15, 2000

    Shipping: Lack of reforms subdues growth

    Indian shipping companies have benefited immensely as a result of the buoyancy in the freight rates and improvement in world trade. Their stocks have appreciated by more than 50% in the last three months and financial results of these companies are also expected to show considerable improvement. However, slow reform processes have suppressed growth for the Indian shipping companies.

    Indian shipping sector is still minuscule compared to global tonnage and capacities. To put things in perspective, India ranks 17th globally, in terms of gross registered tonnage (grt) and 15th in terms of dead weight tonnage (dwt).

    Marginal growth
    (m) FY99 FY00 % change
    No. of ships 490 515 5.1%
    grt 6.9 7.1 2.9%
    dwt 11.2 11.5 2.9%

    The growth of the Indian fleet has slowed down considerably over the last three years. As a result, Indian shipping companies have never achieved tonnage targeted by the planning commission. In fact, the share of Indian overseas sea-borne trade has seen a declining trend for the last three years. For instance, percentage share has dropped from 30.8% in FY99 to 29.5% in FY00.

    What needs to be done? The government should recognise the need to improve basic infrastructure facilities like ports and their handling capabilities. By port handling capacities, we mean, ability to offload cargo in lesser time and the number of ships that a single port could handle at any given point of time.

    Besides, the lack of tax incentives has also been another depressing factor for shipping companies. This is because in countries like Europe and Turkey, there is a concept called ‘tonnage tax’. On every dwt that a shipping company owns, the incidence of tax is calculated upon dwt. So, it needs to pay just a fixed amount as tax, irrespective of whether the companies make a profit or loss. Though it is double-edged sword (the companies may have to pay that fixed amount during lean season also), it has the benefit of limiting tax upfront. This system also enables companies to schedule their fleet acquisition programs based on future cash flows.

    This when to compared to the Indian tax policies for the shipping companies has vast differences. The Indian shipping companies usually pay tax on either profits or loss. So, they rely heavily on depreciation and internal accruals for fleet expansion plans. Another reason that is often cited as a disadvantage to the Indian shipping companies is that they have to necessarily register their ships in India, whereas this is not the case abroad. Internationally, shipping companies are allowed to register their ships in some tax haven (Panama, Liberia or Bahamas), as a result of which there is a lower incidence of tax. In fact, more than 20% of world fleet is registered in Panama.

    Though the industry and the representative organizations have been insisting to introduce such a tax system, there seems to be no reform initiatives from the government, till now.



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