Taxation of Shipping Business: An essential component of global trade is the shipping sector. According to a recent UNCTAD report, the sea carries more than four fifths of the world’s merchandise trade by volume. For transportation and other business purposes, Indian companies also frequently use foreign ships or hire the carriage services of foreign shipping companies. If the income is earned or received in India, the amount paid to these foreign shipping companies might be subject to taxation in India
The Income-tax Act, 1961 seeks to tax the freight earned on account of carriage of passengers, live-stock, mail or goods shipped at any Indian port as also any port outside India; whereas the treaties provide exclusive right of taxation to the country of residence or place of effective management of the foreign shipping company.
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Key Operators in Shipping Business
Main Line Operators (MLO)
- Own/Charter vessels which carry cargo from the port of origin to the destination-port
- Issue B/L to shippers/NVOCC for the entire voyage
- Earn freight income from shippers
Feeder Vessel Operators (FVO)
- Serve MLOs whose vessels do not call ports of origin/destination
- Own/charter vessels which carry cargo between origin/destination ports and hub ports i.e. “Relay” Cargo
- Issue Service B/L to MLO for voyage between the origin/destination ports and hub ports
- Earn freight from MLO
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Non Vessel Owner Common Carrier (NVOCC )
- Do not own, charter or operate any carrying ship
- Undertake transport of goods using container slots booked on the vessels of other operators
- Consolidate small packets/cargo of various shippers into container loads i.e. act as consolidators
- May own or hire containers
Types of Charters in Shipping Business
1. Bareboat Charter
- ‘Bare’ ship is given on hire (i.e. without crew, equipment,)
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2. Bareboat Charter cum demise
- Charter where ownership is intended to be transferred to the charterer after a specified period – Sale transaction as per AS – 19 – “Leases”
3. Time Charter
- Hire of a fully equipped ship usually along with crew
- Agreement is for a definite period
4. Voyage Charter
- Hire of a fully equipped ship usually along with crew
- Agreement is for a particular voyage
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Taxability of Shipping Business Operators
Section 44B under Income Tax
- Deals with assessment of ‘Regular’ shipping business
- Starts with a non-obstante clause
- Overrides sections 28 to 43A
- Income deemed at 7.5% of Export freight (wherever received) and import freight (if, received in India) Freight to include demurrage, handling charges or other similar charges
- NOC from Port AO for PCC mandatory unless Annual DIT (E) obtained from the jurisdictional AO containing name of the (Cir. 30/2016)
- Filing Voyage Return is mandatory
Section 172 under Income Tax
- Deals with levy and recovery of tax of ship belonging to or chartered by a non-resident
- Starts with a non-obstante clause
- Overrides all other provisions of IT Act
- Income deemed at 7.5% of
- Export freight (wherever received). Includes demurrage, handling charges or any other similar charges – S 172(4)
- Procedure for levy and collection of tax, Voyage return, NOC for obtaining PCC, etc. Benefit of Cir. 30/2016 is available
- Filing Voyage wise return is mandatory
- AO to complete assessment within 9 months from the end of the relevant financial year – S. 172(4A)
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Tax Benefits to Shipping and Airline companies set up in IFSC
- Income by way of royalty or interest on account of lease of ship paid to foreign entities is fully exempt from tax in India
- No Capital Gains tax on transfer of ship by a IFSC Unit enjoying 100% tax exemption
- The above two exemptions are subject to IFSC Unit commencing its operations by 31st March2024
Port Clearance Procedure
Step 1. Obtain DIT Exemption Certificate, wherever FSC is entitled to DTAA benefits, along with Annual NOC from the jurisdictional AO
Step 2. File undertaking with AO at the concerned port (guaranteeing to file voyage return and make arrangement for payment of taxes) before arrival of the ship and obtain Voyage- wise NOC, if annual NOC is not available
step 3. Obtain PCC from Customs Authorities on the basis of Annual NOC / Voyage – wise NOC
step 4. Ship is allowed to leave India on the basis of PCC from Customs Authorities
step 5. File Voyage Return u/s 172(3) within 30 days of the departure of the ship along with challans for the taxes paid, or file DIT Relief Certificate, if no tax is payable
step 6. Time-limit for passing voyage assessment order u/s 172(4A) – 9 (nine) months from end of the financial year in which Voyage Return filed – Inserted vide Finance Act 2007 w.e.f. April 1, 2007
step 7. Option u/s 172(7) to be taxed under other provisions of the Act to be exercised before end of the assessment year.
Read Also: Difference between Section 44AD, 44ADA and 44AE of Income Tax Act
Conclusion
In view of complexity is introduced by tax considerations, particularly those pertaining to Sections 44B and 172, which highlight the importance of following CBDT Circulars. Strategic choices are vital because International Financial Services Centers offer specific tax exemptions, and foreign shipping companies can take advantage of DTAA benefits. This thorough guide provides a road map for navigating the legal, operational, and tax aspects in the maritime domain, with the goal of empowering industry participants with insights into the complex world of shipping.
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