Service tax

20 January 2017 

On 12 January the Indian Government issued notifications related to the payment of Service Tax. This followed an amendment imposed already in 2016 where ocean transportation, which previously had been on the “negative list” and thereby exempted from the said tax, was removed from this list. The 4.5 percent tax on the gross earnings was consequently payable by the parties involved with the shipping of imported goods, which at that time was the owners of the ship if it was an Indian shipowner / liner operator and the cargo interests (importer, consignee) if the transportation was done on a foreign ship.

The change imposed on 12 January this year is intended to come into effect by 22 January. It is apparently now the owner / operator of the foreign ship who is responsible for this amount, which must be paid to the local agent along with the port disbursement prior to the ship’s departure from the Indian port.

With the tax being 4.5% of the gross earnings, it is a heavy burden on the owners in an already depressed market. Since it is a “service tax” and not an income tax it is not subject to any double taxation agreements no matter where the owner / operator of the ship is registered.

The “service tax” appears to be a tax on the increase in value of imported goods based on the transportation cost for the ocean transport and is in BIMCO’s opinion, cargo-related as opposed to ship-related. Still, however, many shipowners will find themselves in a situation where the governing charter party does not allow the owners to pass such extra cost on to the charterers. This will be a problem for cargoes already fixed, perhaps even by virtue of long term COA’s and we understand that several parties are challenging this change in legislation in the Indian High Court seeking for review or at least for more time before it takes effect.

Even though the Indian agents BIMCO has been in contact with, confirm that this tax is now payable by the owners based on the latest change in legislation, there is generally a lot of uncertainty about the matter. Several stakeholders in Indian shipping appear to be in agreement that this tax is related to the cargo and recommend that the costs are passed on the charterers. For many liner operators this may not prove to be a problem as they may already be able to do so under their own booking notes or at least be in a position to amend the terms of the standard booking notes to this effect going forward.

For operators of bulk ships, we strongly recommend ensuring that the charter parties clearly state that this service tax is to be reimbursed by the charterers, say along with the freight. Alternatively, include the actual cost in the voyage calculations to avoid costly surprises.

It is at this point in time difficult to obtain more clear information about the reasons for the changes and whether this amendment to the legislation will be delayed. We will monitor the situation and more information will be posted on our website when available.

For further information please contact BIMCO Support & Advice.

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