Budget 2008-09: Shipping
Shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. A higher level of industrial activity would generally lead to higher demand for industrial raw materials. This in turn would boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be highly volatile. Freight rates and earnings of shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth (growth in world trade) and trade patterns, the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage.
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Budget Measures
No major announcement for the sector per se.
Parent company allowed to set-off the dividend received from its subsidiary company against dividend distributed by the parent company; provided that the dividend received has suffered DDT and the parent company is not a subsidiary of another company.
Budget Impact
Nil
Company Impact
Nil
Industry Wishlist
Indian National Ship Owners Association (INSA)
Book profit on sale of vessels to be treated as arising from 'core activities' of a tonnage tax company
Interest income from compulsory reserves to be treated as arising from 'core activities' of a tonnage tax company
Service tax on input services should be zero rated
Certain administrative changes in the manner of assessment of seafarers' taxation to be implemented
Budget over the years
Budget 2005-06
Budget 2006-07
Budget 2007-08
Approved the revised proposal for time-bound implementation of International Transshipment Terminal (ITT) at Kochi port
Under NELP VI, 55 blocks and area of 355,000 sq kms offered.
Investment of Rs 220 bn expected in the refinery sector in the next few years.
National Maritime Development Programme (NMDP) approved. Work is in progress in 101 projects covering inland waterways, shipping and ports including deepening of channels in Kandla, JNPT and Paradip.
Plan allocation for Department of Shipping increased by 37% to Rs 7.4 bn.
Ship management services brought under the service tax net.
Custom duty on dredgers (dredging vessels) brought down to Nil
Dredgers also to be exempt form additional custom duty of 4%
Hike in dividend distribution tax from 12.5% to 15% on dividends distributed by the companies
Additional cess of 1% on all taxes to fund secondary education and higher education.
Government's thrust on oil exploration: Energy security remains one of the top agenda for a country like India, which imports nearly 70% of its crude oil requirements. In a bid to encourage oil exploration activities in India, the government laid down the New Exploration and Licensing Policy (NELP) in 1997-98. This has led to a substantial increase in exploration activities by private players. As the investment in the oil explorations activities pick up pace, we expect the demand for offshore services in terms of rigs and offshore support vessels to remain strong.
India to become a refinery hub: The current refinery capacity of India is close to 132 MMTPA. The domestic refining companies have planned capacity additions to the tune of 90 to 100 MMTPA in the next 4 to 5 years. With the large-scale commissioning of refining capacities, India is likely to emerge as a refining hub. This is likely to result in a significant demand for crude and product tankers.
Focus on port infrastructure: In 2005, Ministry of Shipping, Road Transport and Highways announced the Rs 610 bn National Maritime Development Programme (NMDP) to boost infrastructure at major ports in the next 10 years. The programme is expected to increase the port capacity from 390 MT to 920 MT by 2014.
Key Negatives
High order book to put further pressure on tanker freight: The crude tanker freight rates have eased from the peaks of 2005 and 2006. At the end of December 2007, the world order book for the tanker segment stood at 158 mdwt, representing 40% of the existing tonnage of 395 mdwt. Such a significant tonnage addition will put further pressure on the tanker rates. Production cuts from OPEC in order to influence oil prices is another negative, as it will create excess capacity. The only saving grace we think would be scrapping of single-hull ships, which could neutralise the supply overhang.
Taxes: The Indian Shipping industry is currently subjected to 12 different kinds of taxes, which do not provide a level playing field for them vis-à-vis foreign players.