After 24 years, Indian tax authorities have finally agreed to rewrite rules for seafarers working on Indian-flag ships to qualify them for non-resident status and end an anomaly that is cited by local fleet-owners as the main reason for an acute shortage of sailors to man their vessels. Finance minister Arun Jaitley signed off on the new rules in early September. Taxmen are currently engaged in drafting a notification to give effect to the decision. A seafarer serving on Indian ships outside India for a period of 182 days or more in a year is considered to be a non-resident.

However, the time spent by a ship in Indian territorial waters is considered as period of service in India, according to tax rules framed in 1990. As Indian ships generally operate in Indian trades and Indian ships call frequently at Indian ports, a large number of Indian crew employed on Indian ships, though trading outside India, face difficulties in complying with the 182-day criteria for getting a non-resident Indian status. For instance, an Indian ship going from India to Singapore passes through various Indian ports on its route such as Nhava Sheva, Kochi, Kandla, etc.

Thus, the Indian ship starting its journey from Nhava Sheva in Maharashtra heading for Singapore remains in Indian coastal waters for quite a few days before crossing the coastal boundaries of India. In this case, the number of days outside India of Indian crew working on such Indian ships gets counted only from the date when the Indian ship crosses the coastal boundaries of India. However, Indian crew serving on foreign ships for 182 days or more are treated as non-resident, irrespective of where the ship trades (including Indian waters). This led to a continuous drift of personnel from Indian ships to foreign flag ships under the lure of higher “take home” pay packets, without having to pay tax in India due to this un-intended differential tax treatment.

As a result, Indian flag ships that are by law required to hire only Indian crew, face an acute shortage of experienced manpower, particularly in the officers category. The tax authorities have now decided that the period of stay of seafarers outside India is calculated on the basis of the dates stamped on their passports/ continuous discharge certificates (CDC) when they embark from an Indian port. As a result, the period spent by a ship in Indian coastal waters is also taken into account for computing the non-resident status and the resultant tax concessions, said Abdulgani Y. Serang, general secretary of the National Union of Seafarers of India (NUSI).

This will give a tax boost to some 70,000 seafarers. It is also the second initiative taken by the Narendra Modi government for the benefit of Indian seafarers. In July, the government issued detailed guidelines to implement a so-called Indian-controlled tonnage (shipping capacity) policy announced in the Union budget making it mandatory for fleet-owners to hire Indian crew and provide training slots for cadets on such ships, in line with the requirements of the tonnage tax scheme.

Tonnage tax is a levy based on the cargo carrying capacity of ships as compared with the traditional corporate tax. The tonnage tax scheme was introduced by the Union government from 2004 as a substitute for corporate tax. More than 90% of the global shipping fleet operates on tonnage tax, where the tax burden is just 1-2% of their income, compared with the corporate tax rate of 33.9%. The Indian controlled tonnage scheme frees local fleet-owners from mandatorily registering their ships in India as required by the Merchant Shipping Act of 1958.

As a result, shipowners can register their ships acquired henceforth either in India or abroad. Ships that are registered overseas by local fleet-owners will come under the category of Indian controlled tonnage. A minimum of 50% of the crew (officers and general purpose staff combined) engaged on the Indian-controlled vessel as per statutory requirement, or actual deployment, whichever is higher, should be Indian crew holding relevant Indian certificates. The vessel, if operating on the Indian coast, or Indian offshore oil fields, must engage trainee cadets/officers in accordance with the provisions of the tonnage tax scheme, irrespective of whether the fleet-owner avails the benefits of tonnage tax or not.

The trainees so engaged would be distributed equally between the navigational and engineering sides. India is aiming to increase the supply of seafarers to 9% of the global workforce from the existing 7%. However, the backlog of cadets waiting for on-board training runs into thousands, making their education incomplete, choking the supply line and putting “almost trained” young Indians in the unemployed list. This has brought about huge socio-economic upheaval in several families across the country.