Taxation Hurdles Are Making Indian Ship Makers Register Abroad

Late last year, the government’s ‘Make in India’ push was directed towards India’s coastal shipping with a new Coastal Shipping Bill. The government proposed in the Lok Sabha a separate law for coastal shipping that was previously governed under Chapter 14 of the Merchant Shipping Act of 1958.

The bill aims to boost coastal shipping development by making processes easier. If passed, the Merchant Shipping Act 1958 will be split into two laws. Among other changes, Indian-flagged vessels in coastal waters won’t need general trading licenses.

The bill may be a step in the right direction, but there is a bigger problem for the Indian shipping industry — that of high taxes. This is something the industry has flagged for years.

“We understand that the government is of the view that once they remove the taxes for ships, this will lead to a cascading demand from other industries. This time, we have given them a table showing that amongst the top 10 ship-owning nations in the world, none impose this kind of GST/VAT,” Anil Devli, chief executive officer at the Indian National Shipowners Association told The Core.

At the moment, experts believe that just making licensing easier won’t be enough. India relies heavily on foreign-flagged vehicles because the domestic fleet isn’t large enough to meet the coastal trade demand. While making licensing easier can improve the situation, unless taxation on the sector is reduced, Indian-flagged vessels will continue to be more expensive and there would be less investment to increase the number of vessels in the fleet.

High Taxation = Less Indian Vessels

India faces a massive challenge of cost-competitiveness in coastal shipping. While cabotage rules pose restrictions on foreign vehicles, Indian-flagged vehicles are expensive because of the taxes imposed on them.

“Since the foreign-flagged vessels don’t pay duties, seafarer wage taxes, or GST, their operating costs are much lower. Meanwhile, we are stuck paying every tax in the book, so our participation in the Indian market stays small,” Devli said.

Shipping needs to be equal and competitive for both the Indian and foreign-flagged vessels but Indian ships get hit with taxes that foreign competitors don’t face, making it impossible to compete.

“Foreign companies swoop in with cheaper services because they have no tax burden, while Indian vessels are forced to find business opportunities abroad. That’s the key point. It’s not about how many ships we have or their size; it’s about the uneven playing field,” Devli added.

Operators of Indian-flagged vehicles often have cash flow issues since the 5% IGST takes time to reclaim, and GST on operating expenses can only be claimed if the company is registered in the state where the expense occurred. This makes operations more complicated and costly.

“We are pushing to eliminate the 5% GST, which acts as an entry barrier for Indian companies wanting to own vessels. That extra 5%—beyond the cost of the vessel—can’t even be financed because it’s a tax. We’ve proposed removing it for vessels above a certain size, particularly those India can build domestically," Shitesh Ranjan, ship surveyor cum deputy director general of shipping at the Directorate General of Shipping told The Core.

Shipowners Going Abroad

The high taxes are driving Indian shipowners to register and operate their vessels abroad, where regulations are simpler and taxes lower.

“No one wants to register ships in India because of the complicated rules and strict policies that are hard to comply with. Now, they want coastal cargo to be handled exclusively by Indian-registered vessels. Honestly, I’m not sure how well that’s going to work,” Prakash Iyer, regional manager of Yang Ming Marine Transport Corporation told The Core.

As of December 2023, India had 1,526 registered vessels, with around 32% (488 vessels) operating internationally. Despite nearly 500 Indian-flagged vessels engaged in overseas trade, a whopping 93% of India’s export-import (EXIM) cargo is still carried by foreign-flagged ships. This shows how limited the Indian fleet is in handling large international volumes.

Devli said that the Federation of Indian Export Organisation (FIEO) has estimated due to lack of tonnage of Indian ships, our economy pays about $60 billion as freight each year to foreign ships.

“We are actually funding the growth of foreign ships with our money and stunting the growth of national tonnage,” he said.

On the other hand, according to the Directorate General of Shipping, about six Indian-flagged vessels were added in 2024 (January - August). “Out of $1.1-1.2 trillion in Indian trade, nearly $100 billion goes to freight. Despite strong growth in merchandise trade, our shipping sector isn’t keeping pace—it's growing, just not at the same rate as it should be,” Ranjan said.

Unless the government steps in with tax relief and reforms, Indian shipping will continue to be outpaced by foreign competitors. There is growth potential—but only if the tax burden is lifted.

“Buy a ship and bring it to India, and you’re hit with 5% GST—on a $50 million vessel, that’s $2.5 million upfront. Meanwhile, foreign-flagged ships operate here duty-free, pushing Indian owners to register overseas. No wonder our fleet looks small on paper,” Devli explains.

The industry and the government understand the tax burden challenge. But what is stopping the government from easing taxes?

“When it comes to government sectors, the Department of Revenue decides, but the Director General of Shipping witnesses the direct impact. We handle permissions for foreign-flag vessels operating in coastal or Indian charter runs, so we see the effects firsthand. It takes time and multiple iterations to align both sides,” Ranjan added.

What’s The New Bill About?

The new bill proposes a significant reform by eliminating licensing requirements for Indian-flagged vessels. It allows these vessels to trade along the Indian coast or elsewhere without any restrictions, marking a major shift in maritime policy.

“The first key reform for Indian ships is that they will no longer need a licence. Every Indian ship involved in the trade is getting a licence from the DG Shipping or the Mercantile Marine Department. Once this bill becomes law, Indian-flagged vessels can trade without a licence,” Ash Mohammad, deputy director general at the Directorate General of Shipping told The Core.

With no licensing hurdles, coastal shipping—which currently handles 6% of India’s freight movement—can play a pivotal role in lowering logistics costs and alleviating road and rail congestion, particularly for bulk goods like coal, fertilisers, and petroleum.

That said, the coastal shipping sector has long faced obstacles such as poor port infrastructure, regulatory bottlenecks, and high operational costs. The bill aims to tackle these issues and unlock the sector’s untapped potential.

Before 2014, shipowners had to visit the DG office every 6, 8, or 10 months to renew their licences. “In 2014, we introduced long-term licences, but once this bill is passed, even those won’t be required. As long as your vessel is registered under the Indian flag and holds valid certifications, you’re good to go,” Mohammad said.

Despite the potential benefits, there’s industry anxiety about being forced to rely solely on Indian-flagged vessels for trade. “The government has been pushing for Indian-flagged vessels to exclusively carry Indian cargo, but the problem is we simply don’t have enough vessels,” Iyer said.

Mohammad clarified that the government intends to encourage traders to prefer Indian-flagged vessels, not to make them the sole option, as India currently relies heavily on foreign vessels for overall trade.

Need for More Indian-Flagged Vessels

As of June 2024, India had 1,530 Indian-flagged vessels with a combined gross tonnage (GT) of 13.7 million. Out of these, 1,041 vessels (68%) operated in coastal trade, while 485 vessels (32%) were engaged in overseas trade.

“We don’t have enough vessels to launch a coastal shipping service exclusively with Indian-flagged ships. Sure, international vessels are available, but buying them doesn’t seem wise—most are built in China. Instead, why not let our local shipyards handle it? This would allow for up to 90% Indianization, supporting smaller shipyards and reinforcing the ‘Make in India’ initiative,” Johnson Mathew, chairman and managing director of TransAsia told The Core.

To encourage domestic participation, the Bill favours licencing rules for Indian-built ships and Indian crew, intending to boost local shipbuilding and generate employment for Indian seafarers.

It also includes provisions for inland vessels, aiming to enhance maritime security and support the local shipping industry.

While new initiatives are being rolled out, the big question remains: will stakeholders be keen to invest?

“Stakeholders will invest only if the project becomes viable, which requires certain guarantees around cargo. I noticed the bill mentions public sector undertakings (PSUs) guaranteeing specific cargo volumes. Reserving PSU cargo for backhaul operations could drive growth. With sufficient cargo flow, the service can succeed. Today, India has enough mainline ports—unlike a decade ago—enabling Indian cargo to be transshipped through Indian ports, collected from minor ports, and efficiently connected by road and rail,” Mathew said.

India faces several challenges that need urgent attention if the goal is to boost coastal trade using Indian-flagged vessels.

A 2019 ADB report titled Action Plan for Promotion of Coastal Shipping in India highlighted key issues beyond taxation. Differences in regulations and operational costs between Indian-flagged and foreign-flagged vessels remain significant barriers to growth.

“The government needs to stop taxing maritime services unnecessarily. One of the main reasons shipping isn’t as competitive as it could be is the constant taxation. We’re talking not just indirect taxes, but direct ones too. Unless this changes, we won't see more investment in Indian shipping—it’s really that simple,” Devli said.

Addressing these disparities is crucial for making Indian-flagged vessels competitive in both coastal and overseas markets. The solution sounds simple but requires bold steps—reduce taxes to encourage investment.

“If shipping were made more attractive by cutting taxes, people would invest. You could see the same 20-25% return on a ship as you would on opening a restaurant. More ships would lead to more cargo, and costs would naturally come down,” Devli said.

Internationally, ship acquisitions are financed through foreign currency bonds offering long-term loans (15 years), whereas in India, banks provide shorter loan durations (6–8 years) with tougher conditions. Due to the high-risk perception of the maritime sector, banks require additional collateral beyond the ship itself, which makes it difficult for small shipowners to afford vessels.

"Registering a ship in India is a complex process, limited to citizens, businesses, or societies. This bill will allow more entities, like partners, to invest in ships. Ships aren't currently recognised as infrastructure, which restricts access to long-term loans. Once the bill is passed, we aim to relax these rules, enabling both Indian and foreign companies to own ships," Mohammad said.

Indian-flagged vessels face interest rates of 12–14%, much higher than the 5–6% rates found abroad. Even external commercial borrowings (ECBs) come at a steep cost due to hedging fees. However, if shipowners earn in USD, they can lower their borrowing costs. With 20% of revenue in USD, they can secure 45% of their loans in USD, bringing the effective interest rate down to around 8.8%.

“With the new Bill, the offshore and rig sectors owned by Indian companies will see a positive impact. However, for other coastal sectors to benefit, the government needs to eliminate taxes. Without tax relief, we won’t see any major change,” Devli