2.4 EARLIER REPORTS
Several committees were appointed by the central government in the last four decades of
the presiding century to examine the state of the coastal shipping industry included the
following:
• Coastal Shipping Committee / RD Pradhan – 1981.
• Working Group on Coastal Shipping / D.K. Afzalpurkar – 1993.
• National Shipping Policy Committee / M.P. Pinto – 1997.
• Tenth Plan Sub-Group (Coastal Shipping) / P.K. Srivastava – 2001.
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The problems of this industry broadly diagnosed by these committees were:
• Lack of infrastructural facilities in minor ports
• High tariffs in major ports
• Cumbersome customs procedures
• Customs duties on bunkers and spares
• High manning scales
• Non availability of concessional finance for acquisition of vessels
• Rigid conditions for dry docking coastal vessels in foreign yards
• Absence of special Coastal Shipping legislation
2.5 ISSUES AND PROBLEMS IDENTIFIED
Some of these issues are no longer valid, while some have largely remained unadressed
and therefore continued to bedevil the growth of this industry especially the following:
a) Manning
Repeated pleas over the year for lowering of manning scales standards for coastal ships
vis-à-vis foreign going vessels have not been heeded. The point made in support of this
argument was that coastal ships spent must less time at sea unlike foreign going vessels,
they don’t undertake deep sea voyages and officers on board these vessel do not need the
same level of training and sophistication as for officers for foreign going vessels calling at
different ports in various countries.
The 1978 & 1995 STCW conventions permitted special concessions to ships plying
within ‘near coastal’ areas, which were to be defined precisely by the maritime
administrations. Since India did not act upon it on the engine side particularly, no
concession became available for vessels trading along or near the coast. Since the
manning scales were statutorily fixed (Section 76 of the MS Act) no alteration was
possible without the amendment of this provision. The 2002 amendment of Merchant
Shipping Act however vested the powers to prescribe manning scales in the Central
Government. In exercise of thus manning scales for near coastal vessels (NCV) plying
between India, Bangladesh, Sri Lanka, Myanmar, and Maldives have been made less
stringent.
Since no separate scales for coastal vessels plying exclusively between Indian ports have
however been prescribed and these vessels too have to comply with NCV scales. Some
segments of the industry have however been demanding that the manning scales for the
coastal vessels should be much less stringent than for NCVs.
The Consultants however feel that existing NCV scales prescribed for coastal vessels
between Indian ports should not be relaxed further in the interest of safety.
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b) Import Duties
Bunkers
Coastal ship owners are required to pay duty on oil bunkers unlike foreign going vessels.
This results in significant increase in the cost of operations of these vessels, furthermore,
when a foreign going vessel is converted into a coastal vessel it entails assessment of
duties payable on bunkers remaining on board. This exercise is highly cumbersome and
leads to further delays.
Analysis shows that while FO bunkers for coastal vessels cost 27.55 percent more than
foreign going vessels and in the case of HFHSD bunkers cost rises to 36.35 percent
(Table 2.12).
Table 2.12 Cost of Coastal and Bonded Bunkers
Rs. per
million tonnes
Coastal Bonded Difference. %
Difference
FO 15848.01 12268.24 3579.77 27.55%
HFHSD 24806.20 18192.61 6613.59 36.35%
Source: IOC; Chennai Prices including delivery as on 31.03.03
This factor by itself does not put the coastal shipping at a disadvantage vis-à-vis road or
rail, as fuel consumed by these modes is also dutiable. The cost of diesel to the road
transport operator for example is more or less the same as it is for the coastal operator.
Nevertheless there is a strong case for duty exemption here because it is relatively more
efficient and environment friendly. At any rate, this mode of transport in initial stages will
require such props to translate its potential into reality.
Spares
Capital goods and Spares imported by shipping companies for their coastal vessels are
dutiable as per the prevailing customs tariff. Imported as well as Indian made coastal
vessels are heavily dependent on foreign made spares. The duty on imported spares
however significantly increases the burden on coastal ship-owners.
Ironically, while tax relief is available to the coastal ship-owner on spares imported for
repairing his vessel through a ship repair unit registered with the DG Shipping and also
fitted by the same unit on board; tax is leviable for spares imported other than through
this channel. The ship repair unit also charges a fee for its services typically up to 10
percent. All this effectively adds to a burden of around 15 percent of the landed cost of
the spares estimated at around 3 percent of the total cost of operation.
Here to the burden on duty of import of spares merits review especially for coastal vessels
at least built overseas.
c) Customs Procedures
Cumbersome customs procedures have since long been impeding the growth of coastal
shipping. Our examination of the current situation reveals however that through the
notifications of on 07.10.97 and P.N.190/97 dated 20.10.97, coastal ships have been
exempted from the provisions of Section 92, 94, 97 and 98 (1) of the Customs Act, 1962.
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This means that coastal ships no longer have to file a bill of coastal goods at load ports,
bill of entry at discharge ports or obtain written permission before leaving a port.
Given this customs procedure can no longer be said to border on rigidity.
d) Income Tax
Corporation Tax
Indian shipping companies today have to pay Corporation tax at 36.75 percent or
Minimum Alternate Tax at 7.5 percent.
In contrast, 85 percent of the global fleet pays tax at just 0 to 2 percent. This is because
most of the global fleet is under “Tonnage Tax” regimes, where tax is computed on the
notional income of a shipping company based on the tonnage of its fleet, irrespective of
whether the company makes a profit or loss. The Indian National Ship Owners
Association has suggested a slab system for corporation tax as given in Table 2.12.
Table 2.13 Slab System for Corporation Tax
NRT RATE
(RS. / NRT)
Up to 1,000 40
1,000 to 10,000 30
10,000 to 25,000 25
Every subsequent 5,000 15
The industry argues that tax saving leveraged with debt will help add vessels to the Indian
fleet. Norway, for example, added 5.5 million GRT (almost as much as the entire Indian
fleet) from 1996 to 1998 with the introduction of tonnage tax. The non-availability of
such a tax regime in India makes it difficult for Indian shipping companies to compete
globally. This also perhaps explains why foreign shipping company has set shop in India
even after this industry was open to 100 percent FDI.
The case for substituting the existing tax regime by a tonnage tax regime for coastal ships
has to be viewed in the changed perspective of encouraging diversion of freight from road
a or rail to coastal shipping. This could be yet another in the basket of incentives for
promoting the growth of coastal shipping.
Personal Income Tax on Seafarers
An Indian seafarer who is employed on a foreign vessels for 183 days or more in a year is
entitled to non-resident status as per Section 6 of the Income Tax Act, 1961 and therefore
eligible for income tax exemption. The CBDT has however held that an Indian seafarer
who is employed on foreign-going Indian vessels will be entitled to such status only if he
spends 183 days or more outside Indian territorial waters. In other words this means the
amount of time spent at Indian ports or in Indian territorial waters will be reckoned as
spent in India, neutralising the claim of such a person for non-resident status.
The Board has also held that a seafarer employed on Indian coastal vessels is not entitled
to count the period spent on board such vessels towards non-resident status and the
exemption from tax is hence not available to him.
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These provisions have led to migration of seafarers, especially officers from coastal
vessels to foreign going vessels.
e) Sethusamudram & Pamban Canal Projects
Inter-coastal movement in India i.e., sea transit from East to West coast or vice-versa
involves going around Sri Lanka. If a navigable canal was available between the
southeast coast of India and the northwest coast of Sri Lanka, there would be considerable
saving in sailing distance and time. The Sethusamudram Canal project is the answer.
In this regard, several proposals examined over the years. In 1860, A.D. Taylor of the
Indian Marine proposed cutting across Pamban Island in Ramanathapuram district of
Tamil Nadu, close to Talaimannar in Sri Lanka. Subsequent proposals have essentially
revolved round Taylor’s suggestion including the report by Robest Bristow in 1921, the
Ramaswami Mudaliar Committee report of 1956 (which recommended completion of the
project during the Second Five Year Plan), the Nagendra Singh Committee report of
1968, the H.R. Lakshminarayanan Committee report of 1983 and the Pallavan Transport
Consultancy Services report of 1996.
The Union Government has asked the National Engineering Environment Research
Institute (NEERI) to conduct an Environmental Impact Assessment. In general, a depth
of 12 metres is sought to be achieved, enabling 10,000 to 12,000 GRT vessels to pass
through. This canal would shorten the distance from Chennai to Colombo, for example,
from the 640 NM today to 396 NM. A voyage from Chennai to Mumbai would bring a
saving of 376 NM. This will roughly translate into 36 hours of transit time for intercoastal
voyage.
The cost of the project was estimated at Rs. 1,200 Crores in 1996 for 10.67 m draft with 4
to 6 years approximate time for construction. It was estimated that if toll tax were
imposed at the rate of Rs. 17 per million tonne, payback at the 1996 volume of traffic
would be in 15 to 16 years. In reality, traffic may pick up if the canal is constructed and
payback period shortened. Today Colombo port thrives on transhipment of Indian cargo
and the proposed canal may have adverse implications on the Colombo port. The
alternative proposal of the Sri Lanka government favours the construction of land bridge
from Dhanushkodi in Tamil Nadu to Talaimannar in Sri Lanka at an approximate cost of
US$ 880 Million.
Fate of the Sethusamudram project may be decided in due course of time by the
Government of India, keeping in mind not only the advantages to Indian coastal shipping.
The Consultants recommend that the Pamban Canal project may be initiated meanwhile.
It involves the widening and deepening of the canal near Pamban Island so at to allow
vessels of up to 3000 GRT to sail through.
f) Cabotage
Under the Cabotage law the movement of coastal trade of the country is to be reserved for
its own flag vessels. The impact of such reservations is significant where the country has
along coastline and domestic trade is robust.
Sections 406 & 407 of the Merchant Shipping Act, 1958 provide that a vessel is to be
licensed by the DG shipping if it is to engage in coasting trade of India. In practice,
Chapter 2: Coastal Shipping Problems and Perspectives
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foreign flag vessels are permitted to carry coastal cargo only if suitable Indian tonnage is
not available.
Cabotage provisions in other countries vary in the extent of protection they provide to the
national flag. The most stringent provisions are perhaps those in the Jones Act of the
USA, which reserve domestic cargoes for vessel owned, built, flagged and manned in the
USA. No Waivers are allowed. In the European Union, Regulation (EEC) 3577/92 has
thrown upon the domestic sea-borne trade of any member state to all member states, but
not to others. Australia permits foreign flag vessels to carry its coastal cargo if no
suitable Australian ship is available. At the other end of the spectrum, New Zealand
repealed its cabotage laws in 1994 and opened its domestic sea-borne trade to
international competition.
International competition can integrate domestic and international services through
complex voyage patterns including a coastal leg, improving technical efficiency and
lowering freight rates in the process. At the same time, relaxation or repeal of cabotage
laws could be a threat to domestic tonnage as it will open the door for foreign flag vessels
to carry coastal cargoes. This issue was discussed extensively at the Stakeholders’
Workshop on September 17th 2003 and where the present policy was endorsed.
2.6 SUMMARY
The present chapter deals with coastal shipping problems and perspectives. Though there
are several advantages of coastal shipping, it has insignificant share in the overall
domestic cargo movement. Consultants have highlighted the problems that are being
faced by this sector and impeding the development of coastal shipping. The major
problems and issues identified by the Consultants include differential manning scales,
import duties on bunkers and spares, customs procedures, tax related issues (corporate tax
and personal tax on seafarers), delay in Sethusamudram / Pamban Canal projects etc.
In order to promote coastal shipping, following suggestions are made:
• Existing NCV scales prescribed for coastal shipping vessels between Indian ports
should not be relaxed further in the interest of safety
• Duty exemption on fuel bunkers can be considered for coastal shipping in initial
stages
• Duty on import of spares merits review especially for coastal vessels at least built
overseas
• The case for substituting the existing tax regime by a tonnage tax regime for coastal
ships has to be viewed in the changed perspective of encouraging diversion
• The Pamban Canal project may be initiated that involves the widening and deepening
of the canal near Pamban Island so as to allow vessels of up to 3000 GRT.
