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P. Manoj

The shipping industry is baffled by the riders put in by Mr Jaswant Singh while cutting the lock-in period. Analysts feel that this may not affect serious players, though new entrants may find the covenants to be a disincentive.

THE Finance Minister, Mr Jaswant Singh, has incorporated two covenants to his announcement made in Parliament on April 30, taking the sting out of his decision to cut the lock-in period from eight years to three for sale of ships acquired by Indian ship-owners using the funds accumulated in a reserve account built through tax breaks extended under Section 33 AC of the Income-Tax Act.

Mr Jaswant Singh has inserted a new sub-Section (4) in the Finance Act, 2003, which says that if the proceeds from the sale of such ships are not utilised for the purpose of acquiring a new ship within a year, such sale proceeds shall be deemed to be profits and charged to tax accordingly.

The new Sub-Section (4), which will come into effect from April 1, 2004, states: "Where the ship is sold or otherwise transferred (other than in any scheme of demerger) after the expiry of the lock-in period (now slashed from eight years to three years) and the sale proceeds are not utilised for the purpose of acquiring a new ship within a period of one year from the end of the previous year in which such sale or transfer took place, such sale proceeds shall be deemed to be the profits of the assessment year immediately following the previous year in which the ship is sold or transferred and shall be charged to tax accordingly".

A beleaguered shipping industry, clamouring for fiscal sops to make Indian shipping globally competitive, had welcomed Mr Jaswant Singh's announcement to cut the lock-in period for sale of ships made in the course of his reply to the discussion on the Finance Bill in the Lok Sabha on April 30.

The announcement came as aa big relief to Indian owners considering that buying and selling are a normal part of the shipping business. Given the cyclical nature of shipping operations, owners normally prefer to sell ships rather than operate them, if the opportunity was right. The shipping cycle, which lasts two to three years, presents an opportunity to the owners to sell a ship at a valuehigher than the cost at which it was acquired.

The earlier lock-in period of eight years was thus considered too long, and the owners had requested the Government to cut it short.

The shipping industry is baffled by the riders put in by Mr Jaswant Singh while cutting the lock-in period. Analysts say, however, that this may not affect serious players, though new entrants may find the covenants to be a disincentive.

Despite the covenants, analysts say that owners who are serious about the shipping business will continue to do shipping as the ultimate objective is tonnage growth. But owners who want to take advantage of this clause may not be able to do so. "New, opportunist entrants to shipping may find the covenants a disincentive," says the analyst.

However, serious players can find ways to overcome the covenants and save the amount of profits to be taxed. "The spirit of the Act is that the country should accrue tonnage," says an analyst tracking the shipping industry.

The shipping industry finds Mr Jaswant Singh's rider — that the proceeds from the sale of ships should be utilised for the purpose of acquiring a new ship within one year — a "misnomer".

"A ship cannot be built in one year. Logically, it takes about 18-24 months to build a new ship. So, it does not make sense to have a one-year clause," an industry official said.

Besides, the term "for the purpose of acquiring a new ship" presumably means new acquisitions, which can either be new buildings or second-hand vessels, he said.

Shipping analysts say that serious players can circumvent Mr Jaswant Singh's rider and get out of the tax net. For instance, if a ship owner sold a ship on March 28, 2001, he would have had to invest the sale proceeds in acquiring another vessel (presumably new or second-hand) by March 27, 2002 to avail of tax benefits as announced by Mr Jaswant Singh.

But nothing would have stopped him selling that ship on April 2, 2002. "So, within a period of five days, he can buy and sell the new ship and still make all the profits from the earlier transaction done on March 28, 2001, tax-free," the analyst said. The Finance Act, 2003, does not bar this from happening.

The definition of Section 33 AC was enlarged in the Union Budget for 2002-03 to include an amount equivalent to twice the aggregate of the paid-up share capital, the general reserves and the amount credited to the share premium account of the shipping company for the purpose of calculating the reserve account. Thus, shipping companies could transfer an amount equivalent to twice the aggregate of the paid-up share capital, the general reserves and the share premium account to a reserve account without paying any tax if the fund so set aside was used exclusively for ship acquisitions.

However, ship owners buying vessels through this mechanism could lose the tax benefits available to them under Section 33 AC if they sold or transferred the ships so acquired before the expiry of eight years. This lock-in period has now been reduced to three years, but the riders attached to it have made sure that Section 33 AC remains controversial, as it has been right from its inception.

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