Timeline for mandatory use of Indian flag on SCI vessels may be shortened

The Centre may reduce the timeline for the use of the Indian flag on vessels of the Shipping Corporation of India (SCI) to less than five years. The move is being considered as the government counts down to finalising the privatisation of the public sector undertaking (PSU). The mandatory use of the Indian flag on SCI’s ships has been a bone of contention with prospective buyers, on account of the costs it will entail in terms of taxation and vessel registration, an official said.  SCI has a fleet size of 59. The only benefit that SCI’s buyer can get through .....
The Centre may reduce the timeline for the use of the Indian flag on vessels of the Shipping Corporation of India (SCI) to less than five years. The move is being considered as the government counts down to finalising the privatisation of the public sector undertaking (PSU).

The mandatory use of the Indian flag on SCI’s ships has been a bone of contention with prospective buyers, on account of the costs it will entail in terms of taxation and vessel registration, an official said. 

SCI has a fleet size of 59.

The only benefit that SCI’s buyer can get through the use of the Indian flag is the right to first refusal when it comes to contracts from PSUs. However, given that all PSUs in non-strategic sectors are expected to be privatised eventually, the right of first refusal, too, will not remain with it and will go to the lowest bidder, the official said.

Hence, the Department of Investment and Public Asset Management (DIPAM) is considering reducing the period for bearing the Indian flag on SCI vessels to less than five years. 


The use of the Indian flag means that the vessel would be registered in India and be liable to pay taxes in accordance with the Indian tax system, explains Abhishek A Rastogi, partner at Khaitan & Co. In other words, when the location of the service provider is in India, the services would be subject to GST and direct taxes as well, he adds. 

However, when the location of the service provider is outside India and the services are procured by the Indian service recipient, the tax will have to be paid under the reverse charge by the service recipient in India, says Rastogi.

Most shipping companies are registered in Panama where the effective tax on income earned outside the tax haven is nil. But after the introduction of the SEM regime (multinational headquarters regime) in 2018, the effective tax rate in Panama is 5 per cent if certain conditions are met.

Rastogi says that in case of a share transfer of SCI, its legal incorporation would not change. If a foreign entity acquires the PSU, its compliance burden would increase, he points out. The buyer would also have to pay for the cost recovery charges that the government gets from ports where customs officers are posted.

“Completing the divestment of the Shipping Corporation of India may also result in loss of revenue in the form of taxes for the Indian government as the potential buyer may switch the tax base to outside India. Tax haven countries like Panama offers ‘Nil/ negligible tax rates’ for shipping companies, which register their vessels under the Panamanian flag, while Indian shipping companies have to pay more than 30 per cent tax,” said Om Rajpurohit, director, corporate and international tax, at AMRG & Associates.

However, the favourable tax regime is not the only reason most private shipping companies get themselves registered in Panama — the country’s geographical location and legal conveniences also play a part in that decision.

Panama, Liberia and the Marshall Islands are the three leading flags of registration in terms of carrying capacity and the value of the fleet registered. As of 1 January 2020, these countries represented 41 per cent of the carrying capacity and 33.6 per cent of the value of all vessels, according to the ‘Review of Maritime Transport 2020’ by the United Nations Conference on Trade and Development. 

The number of vessels registered in Panama as of 2020 were 7,886, with 16 per cent of the world’s total dead-weight tonnage. About 3,716 and 3,683 vessels were registered in Liberia and the Marshall Islands respectively, with each accounting for 13 per cent of the total dead-weight tonnage.

As against this, 1,768 vessels had their flag of registration in India, constituting one per cent of the total vessels in the world.


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