In order to ensure that the ship leasing services offered from GIFT City remain globally competitive, and to attract domestic as well as non-resident ship leasing businesses to India, the government needs to provide clarity on application of withholding and similar compliances for such businesses, writes Kunal Savani, Bipluv Jhingan and Lakshya Gupta.
The shipping industry is a strategically important sector for India due to its long coastline and large participation in transporting goods through maritime mode. In this respect, there lies a great opportunity for India in promoting the shipping industry, by incentivising domestic as well as foreign shipping businesses (particularly those offering ship leasing/ financing services) to set up their base in India.
Recognising the need for promoting ship acquisitions, financing and leasing from India, the International Financial Services Centre Authority notified a framework to enable ship leasing businesses to be set up in Gujarat International Finance Tec-City (GIFT City). The framework for ship leasing businesses was notified against the backdrop of a successful implementation of a similar framework for aircraft leasing businesses in GIFT City and enables ship leasing businesses to offer operating lease, financial lease and a hybrid lease with components of both operating as well as financial lease.
Several fiscal incentives have also been provided to ship leasing businesses which register themselves in GIFT City under the notified framework. Such businesses can avail 100 percent deduction on their business income, for a period of 10 years. In addition to this, the tax holiday is also available for any capital gains arising to such businesses from transfer of a ship subject to certain conditions. Last year, under the Budget 2022, the government provided additional reliefs and exempted lease rentals (in the nature of royalty or interest) received by non-residents on lease of a ship to a ship leasing business set up in GIFT City.
While the Government has introduced these tax benefits to provide impetus to the ship leasing industry, there continue to remain certain anomalies which are hampering the smooth functioning of the ship leasing industry in the GIFT City. One such issue is the lack of clarity in the withholding tax provisions applicable to payments made to the lessors.
For tax purposes, entities set up in GIFT City (i.e., separate legal entities and not branch offices) are generally considered to be tax resident in India and thus, all withholding provisions applicable for an Indian resident are applicable for any ship leasing business set up in GIFT City. Unlike in case of withholding tax provisions applicable to non- residents, these provisions may be attracted, even when income is not subject to tax under the Indian Income-tax Act, 1961 (IT Act), i.e., even where the tax holiday is available to such entities.
Specifically, section 194-I of the IT Act requires tax to be withheld on payment of lease rentals to a resident. Earlier this year, a notification was issued which clarified that no tax is required to be withheld under this provision, on payment of lease rentals on lease of an aircraft, if such income is not subject to tax due to availability of the tax holiday in GIFT City. However, the CBDT has not issued a similar clarification with respect to ship leasing businesses.
It is anticipated that a similar exemption would also be given for ship leasing businesses.
However, till such notification is issued, there may be additional compliance or administrative burden on these ship leasing businesses i.e., either such business will have to claim credit for the taxes withheld or obtain a nil withholding certificate from the tax authorities.
Further, income earned on leasing a ship may be characterised as ‘royalty’ or ‘interest’, depending on whether the lease is in the nature of an operating lease or financing lease, respectively. The IT Act provides for a separate withholding provision for interest paid to a resident entity (excluding certain specified cases). Thus, even if exemption is available under section 194-I of the IT Act, and in the absence of a specific clarification, income in nature of interest may still be subject to withholding tax. While these issues may prima facie appear to be procedural in nature, such withholding tax requirements may also result in cash flow (though short-term) issues for such businesses.
Thus, despite the availability of tax holidays, if such businesses are faced with multiple compliance requirements, the same may hamper ease of doing business. Consequently, such hurdles may also impact the goal of establishing a global financial hub in India by making the regime less beneficial, as compared to global maritime hubs in India’s vicinity.
In order to ensure that the ship leasing services offered from GIFT City remain globally competitive, and to attract domestic as well as non-resident ship leasing businesses to India, the government needs to provide clarity on application of withholding and similar compliances for such businesses. Hopefully, additional tax incentives, in line with those offered by major maritime hubs, are announced during the upcoming Budget 2023.
