The situation
The Indian Income Tax Act 1961 in its section 172 deals with "Shipping business of non-residents". Section 172 of the Act applies "for the purpose of the levy and recovery of the tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India" (Section 172 (1)).
Pursuant this provision, freight and demurrage earned (or deemed earned) in India is taxable. For this purpose, it is irrespective whether freight is 'prepaid' or payable at a later stage. The mere fact of cargo being loaded in India against payment of freight suffices for the application of this provision.
The tax is primarily the liability of the party on whose account the goods are loaded, i.e. the carrier.
Exemption
Section 172 of the Income Tax Act 1961 does not override individual Double Taxation Avoidance Agreements ("DTAA") India might have with foreign countries. Therefore, if a company liable for income tax under section 172 of the Income Tax Act is situated in a country that has entered into a DTAA with India, it may apply for exemption from such tax.
In order to apply for exemption, the terms of the DTAA between India and the respective foreign country have to be complied with. Such terms might require a large number of documents to be executed, legalised and submitted to the relevant Indian authorities, well in advance.
Advice
Members, whether owners or charterers, who are "non-residents" for the purpose of Section 172 of the Income Tax Act 1961, will be subject to this tax.
It is recommended that members familiarise themselves with the applicable regulations as well as with a possible exemption, when considering to perform such voyage(s). The procedure for exemption might differ from port to port and members should liaise with their local agents in this respect; further assistance from lawyers and/or accountants may be required.
Also, such tax may lead to arguments or even disputes under the charterparty and members are advised to consider the issue before agreeing the contract.
The Association is grateful to Mr. M.S. Sundara Rajan of PANDI Correspondents Pvt. Ltd. for contributing to this update.