Ports Sector – Miles to travel before achieving tax certainty

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   Ports are a vital lifeline for the growth of the Indian economy, contributing to around 95% of India’s trading by volume and 70% by value.  India has 13 major and 200 non major ports. India is the sixteenth-largest maritime country in the world with a coastline of about 7,517 kms. 

   While much has been written about the issues that plague the port sector, this article will try to highlight some challenges on taxation that the Government needs to actively look at to make this sector viable and competitive.  

Tax and regulatory matters 

  • The Indian Government supports the growth of this sector by allowing FDI up to 100% under the automatic route for port and harbour construction and maintenance projects.  This has allowed large players to actively look at Indian ports as a viable business opportunity.   
  • The Indian Income-tax Act, 1961 (Act) provides for tax holiday to enterprises that develop, operate, and maintain a port, airport, inland waterway, inland port or navigational channel in the sea under section 80-IA. While the provisions have been in place for several years, there is much litigation around its implementation.  
  • In the case of income from operation of ships, clarity is required whether a vessel can be regarded as a Permanent Establishment of a foreign company in cases  where the vessel is  engaged in carriage in the Indian waters only.  
  • Shipping sector has been impacted under the GST law.  A 5% GST was levied on Indian shipping companies that ferry cargo from or to India with no CENVAT credit allowed. The 5% levy is a pure cost as no credit can be taken against that. 
  • Dropshipping is an evolving business in India. In these cases since the customers and suppliers are outside India, it should ideally be outside the purview of GST. However, the person in India who actually receives the order from a customer outside India and passes it on to a supplier outside India is playing the role of a forwarding/lead generation service. This may constitute ‘export of service’ under GST law.  Clarity is required to allow the evolution of new forms of business.   

Conclusion

  Clarity of tax issues in the sector can greatly increase the outlook from a FDI standpoint as well as ease of doing business.  This could give a significant fillip to the sector thereby poising India as a major trade hub.   Increasing investment is intricately linked to economic trade activity. The demand for ports and trade infrastructure will continue to mount as trade diversifies and grows, making a compelling case for the rapid and efficient expansion of India’s port sector. 

   (The writer is Partner Tax&Regulatory Services, BDO India LLP. Mr Ashwin Vittal also contributed to the article.)

 
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