Govt looks to reduce tax on marine diesel oil to boost coastal, inland shipping

New Delhi: The union government is looking to reduce the tax on marine diesel oil (MDO) by building consensus to bring it under the Goods and Services Tax (GST), among other options. The goal is to reduce costs for coastal and inland shipping to help companies become more competitive and attract more cargo for this relatively less-polluting mode of transport.

The ministry of ports, shipping and waterways (MOPSW) will ask the ministry of finance and states to consider reducing taxes and bringing MDO under GST while considering additional incentives for the nascent sector, according to three people aware of the developments.

Revenue loss from the exercise will be minimal as marine fuel consumption accounts for about 1% of India’s fuel consumption. Even if states lose some revenue, they could be compensated for this under GST, one of the people cited above said.

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India's demand for petroleum products including petrol, diesel, liquefied petroleum gas (LPG), aviation turbine fuel (ATF) and naptha is expected to touch a new high of 238.95 million tonnes this fiscal year. At this level, consumption of marine oil would be around 2.4 million tonnes.

Queries sent to the ministry of finance and MoPSW were not answered immediately.

Oil accounts for 40% of operational cost 

Rakesh Singh, secretary, ICC Shipping Association, said, “Reducing taxes on marine diesel oil used by coastal ships and inland waterway vessels would help bring down the high operational costs. Oil cost is almost 40% of operational cost for coastal shipping and any cut in this would be a big boost to the sector.” 

He added, “The reduction in taxes can easily be brought by placing MDO under GST for coastal shipping and inland waterways as 95% of the segment consumes this lighter oil as compared to the heavy bunkering fuel used by large intercontinental ships. Bunker fuel has attracted 5% GST since late 2017 and this rate applies to foreign-going vessels and the movement of container cargo ships on Indian coastal routes.”

The GST rate on bunker fuel was initially set at 18% on the recommendation of the GST Council. On seeing that the high rate of GST on bunker fuel supplied to foreign-going vessels was making India less competitive vis-a-vis neighbouring countries, the GST Council recommended a reduction in GST to 5%. The council said this GST rate on bunker fuel would encourage coastal shipping at par with foreign-going vessels and obviate the administrative problems of monitoring the end-use.

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Another official in the directorate general of shipping, MoPSW, who did not wish to be named, said the proposal to reduce taxes on MDO and bring it under GST was being discussed, and that his office was collecting data on the volume and variety of fuels consumed by the sector. 

MoPSW has also discussed the matter with states at the Maritime State Development Council. The MDO proposal will require approval from states at the GST Council meeting to be cleared.

The official quoted above said a proposal to allow all coastal and inland vessels to use bonded bunkers – special fuels with lower taxes – was also being discussed. The shipping ministry has undertaken a comprehensive study of the issue and taken up the matter with the finance ministry, this person said. The finance ministry has sought a few clarifications, for which discussions with oil marketing companies are underway, the person added.

‘Can’t be done without incentives’

Singh of ICC Shipping Association said case studies of several European countries show that coastal and inland waterways can’t be developed without government incentives.

MoPSW has launched various schemes for the promotion and development of coastal shipping and inland waterways under the Sagarmala programme. About 231 projects with a cost of ₹14,526 crore have been planned to facilitate a shift of more cargo from land-based transportation to waterways. Another  25 projects worth ₹2,906 crore are aimed at providing infrastructure for coastal handling of cargo.

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The shipping ministry’s roll on-roll off cum passenger ferry (ROPAX) service is aimed at reducing travel time, vehicular emissions and traffic on roads. About 75 projects related to the development of ROPAX and passenger jetties have been identified under the Sagarmala programme and are being implemented across the country.

The programme also has 38 inland waterways projects with an estimated investment of ₹4,899 crore, including the NW16 project connecting to the Indo-Bangladesh Protocol (IBP) Route.