September 23, 2010

Tax Axe

The Indian Government has deferred the implementation of the new Direct Taxes Code Bill by a year. Just as well, because this Bill in its present form threatens both seafarer wallets and the supply of Indian mariners to the global shipping industry.

I should say at the outset that the DTC, a Code that will replace the old income tax rules in India, was tabled in parliament by the Finance Minister recently and has been referred to a Select Committee for scrutiny. It is not a done deal just yet. But the big change proposed is in the Non Resident rules that Indian seafarers have long used, to- provided they sailed with foreign shipping companies and stayed 182 days out of the country in a financial year- claim Non Resident Indian (NRI) status and therefore not pay any income taxes in India. The fact that a mariner on a contract went out on fresh employment each time added to the strength of his tax-free argument under the old rules. Since a seafarer did not pay any tax elsewhere either, his entire seagoing income was tax-free. Since he and his family lived in India, a mariner working for a foreign company had to just ensure that he spent 182 or days more sailing on a foreign flag ship to claim NRI tax-free status. That was all.

The DTC proposes to slash the 182-day period hitherto allowed to just 60 days. If experts are reading this proposal correctly, an Indian sailor working for a foreign ship will be able to stay just two months (or more precisely, 60 days) a year in India to avoid paying income tax. Price Waterhouse Coopers’ Director (Tax) Kuldeep Kumar says, "With this change, a non-resident would be at greater risk of becoming an ordinary citizen and become liable to pay tax in India as the threshold limit has been reduced."

The amount of tax will depend on a sailor’s income, of course, but back of the envelope calculations tell me that the tax payable by a Master may end up amounting to around 20% of his annual income, if he sails eight months a year. Which is a month and a half’s full wages on a total of eight months income earned. A significant hit, for sure, especially since his present tax liability is precisely zero.

The Direct Tax Code, in its present form, will make seafaring even less attractive for an Indian youngster choosing a career and will encourage older mariners to quit earlier. However, Indian ship owners will not be unhappy at the taxman’s plans: many have long argued, with no success, for seamen sailing in Indian companies to be given the same tax benefits NRI seamen enjoyed in order to support Indian shipping. They may now feel that Indian flagged ships will become more attractive options for mariners. I tend to disagree, because the fact remains that Indian shipping cannot absorb more than a very small percentage of ‘returnees’ from foreign flags. Not that this fact will bother them much: oversupply of officers in the market never worries any ship owner, who usually pays only sailing crew. In any case, foreign ships will remain relatively more attractive, I think, not just because of the money differential that will still exist after the new tax structure but also because many Indian ships, especially those run on the coast or in near trades, are plagued with substandard maintenance and iffy calibre of crews. (After almost thirty years in foreign shipping, when I was contemplating short tenures on the Indian coast, a Chief Engineer friend of mine, with some recent experience of Indian ships, told me bluntly that I wouldn’t be able to do it because the quality of ships and crews was often terrible. So was professionalism and commitment, both ashore and afloat. We agreed that I either would quit or be unceremoniously thrown out in short time.)

I expect some pressure from other lobbies to amend the NRI clause in the DTC. Seafarer travails do not matter to the public or the politicians: our difficulties have always been easy to ignore. But the objections of Indians working in the Gulf will not be as easy to brush aside; those folk will be hit too, and so will other Indian origin people in the US, Canada and the UK who always seem to be preferred NRI’s over mariners (who are second class citizens at best anyway), and who may well force some tinkering to the DTC. The Gulfies have vote banks in India; NRI’s in the West always have disproportionate leverage in domestic policy. OCI and PIO cardholders shuttling between India and elsewhere will put some pressure too. An amendment to the DTC is hardly an impossibility, in which case Indian sailors, usually at the wrong end of collateral damage, may get some collateral relief instead for a change.

But what if the DTC is kept unchanged?

In that case, perhaps the new tax laws will force foreign ship owners to think up new strategies for officer or crew retention and promote long term (can it be, even permanent?) employment. Perhaps they will think of devising seafarer packages on an annual basis that will minimise, to the extent possible, an Indian seafarer’s tax liability. Perhaps they will use the adversity and turn it into an opportunity instead.

Perhaps, but I do not think that will happen too easily. I think that the trend of employing more Filipinos and others instead of Indians, as many ship owners in Europe are already doing, will probably accelerate. Let’s face it: the quality of Indian seafarers is dropping, and fewer managers can justify paying a premium to many Indians sailing today compared to some other nationalities, Direct Tax Code or not.



Anonymous said...

hope same will apply to the Airlines crew also.

Anonymous said...

So you were a Master, the GOD of the ship. I am the Captain of the ship, My Ship, My cargo, master’s authority.

Amit said...

inspite of new DTC, we still have an option, if we open offshore account (outside india), tax can be saved as well as it will effect indian govt. badly, dollar rate may also rise, it can go up to 80 don't worry about DTC