The Hindu Business Line : Tonnage tax adds weight to Indian fleet

India's shipping tonnage, which for 25 years seemed doomed to remain under 7 million tonnes, has crossed the magical figure of 8 million tonnes in a just a year. An important reason for the upswing is the introduction of tonnage tax as a substitute for the regular corporate tax.

EVEN in 1980 keen observers of the Indian maritime industry had realised that what was described as the "Golden Age" of Indian fleet expansion had come to an end. The so-called Golden Age lasted from 1959 till about 1975 when Indian shipping tonnage went from a paltry figure of 0.59 million Gross Registered Tonnage (GRT) to 5 million GRT. But from then on tonnage stagnated. At that time, policy-makers, anxious to revive earlier growth rates, fixed a target of 7.5 million GRT for the Indian fleet by the end of the Sixth Plan in 1985.

The tonnage at the end of the Sixth Plan period failed to cross even the more modest figure of 7 million GRT, stagnating at 6.36 million GRT. The country fared no better in the next Plan and even the lower figure of 7 million GRT proved elusive. For a short time, in 1996-97, the 7 million GRT was reached but the Indian fleet soon slipped, to the 6 million GRT.

Until the end of 2003-04, the Indian fleet could not cross the 7 million GRT barrier, hovering uneasily at about 6.90 million GRT. It was with justifiable pride, therefore, that Mr G. S. Sahni, Director-General of Shipping, announced at celebrations held to mark National Maritime Day, the news that Indian shipping had not only breached the 7 million GRT benchmark but had actually crossed 8 million GRT and now stood at 8.01 million GRT.

What led to this dramatic turnaround in India's shipping fortunes? For over 25 years India's shipping tonnage seemed doomed to remain under 7 million tonnes. Suddenly in one year this figure crossed the magical figure of 8 million tonnes. Some would give credit to the reform process.

Globalisation and the increased integration of India with the world economy resulted in a rise in merchant trade and, since about 90 per cent of this trade, by volume, is carried by sea, the shipping industry must necessarily benefit. But the reform movement started some years ago and has remained more or less on course. Last year did not see any dramatic new initiative to boost sea trade.

Foreign trade increased but not to the extent that could explain such a huge jump in shipping tonnage and the reversal of a pattern of stagnation in Indian shipping that many feared was permanent. In any event, the significant rise in sea-borne trade was easily handled by foreign carriers. The real reason for the upswing in India's shipping fortunes, then, must be linked to the initiative taken by the Finance Minister in the last Budget to introduce tonnage tax as a substitute for the regular corporate tax to which Indian shipping companies had been subject.

The shipping industry has reacted positively to the Finance Minister's initiative to re-vitalise the sector. For the fleet to record such a sharp increase in the very first year of the new tax regime when many vital features are still not fully in place, speaks volumes for the importance of tonnage tax in increasing shipping tonnage.

The growth of the domestic fleet will definitely lower India's burgeoning freight bill and, given the massive growth in international trade, this is no mean advantage. More important, it will lead to greater employment, bring in huge increases in invisibles and give the country a chance to establish itself as a regional centre for maritime affairs. Ship-broking, chandlering, insurance, manning and ship management could well become, along with BPO and the software industry, the new buzzwords of the Indian economy. And this will be a major change. It is surely more than a little surprising that, even as the country continues to be the largest supplier of trained officer manpower to the shipping industry, not one major manning company is headquartered in India. If fleet expansion continues as before, this and other shipping related industries could become an integral part of India's industrial and commercial scene.

One example, however, of the mindless reversal of a sound policy of encouraging the maritime sector is the recent ruling that the benefits of tonnage tax will not be available to income accruing from sale of ships. It is difficult to understand the logic of this diktat.

If income earned from plying a ship is eligible for tonnage tax why should income earned from selling an aged ship not get the same benefit? Buying and selling ships are as much a part of any shipping company's business as plying a ship on the high seas for profit.

There is another aspect to this: World over, it is recognised that easy acquisition and disposal of vessels is essential for the growth and development of a cyclical industry like shipping. To inhibit this aspect of the industry and declare only the plying of ships as deserving of policy support is to stultify the industry and retard its growth. More important, it acts against all moves to modernise the fleet and reduce its age. If profits from selling a ship are not treated in the same way as that from other activities it will only send out the message that the Government is not committed to a modern fleet equipped with state-of-the-art vessels, which can compete internationally.

Aside of questions of efficiency, what message does this send about avoiding pollution and ensuring that rust buckets do not clutter up the Indian shipping scene? The recent oil spill in Goa only highlights this question.

If Indian shipping is to become a major player in the world maritime industry there must be a strong commitment to modernising the fleet and reducing its average age. Placing impediments in the way of selling old ships and acquiring new ones is no way to do this.

(The author is a former Secretary, Ministry of Shipping.)

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