Ports, Shipping & Oil cos losses to mount despite cut in bunker fuel GST to 5%; topline of shipping firms to fall by 2%

Despite the cut in GST for bunker fuel to 5% from earlier 18%, Indian shipping, oil marketing companies and ports will continue to feel the heat, as the fuel price would still be higher by 2-3% compared with Sri Lanka, Dubai and Singapore. Bunker fuel sales have already dropped by 50-60% for oil marketing companies between July and November, experts said. Shipping companies in India that are already under severe stress of economic meltdown of 2008, that took the Baltic Index and the charter rates to drop to an all time low – and never improved after that – see the 5% GST on bunker fuel as the last nail in the coffin. Read On ..

When the GST was implemented in India on July 1, bunker fuel was placed under the 18% bracket, which shocked the industry and led Sri Lankan bunker fuel sales to rise to 85,000 metric tonne/month in September compared with 72,000 metric tonne per month in August and around 65,000 metric tonne in July. Before July the sales in Sri Lanka ranged between 50,000-55,000 metric tonne/month.

The worst fears of Indian ports were proven right, that increase in fuel prices would force foreign run vessels to opt out to other countries located en-route to Trincomalee in Sri Lanka, Singapore or Fujairah (UAE) diminishing the marine bunker fuels demand at Indian ports.

Under the previous value-added tax regime that preceded the GST, bunker sales to foreign-bound vessels in India were deemed as exports. Only a few states taxed bunker sales to export vessels, even so, at 1.5-2% levels. To that extent bunkering at Indian ports are still costlier compared to the previous tax-regime and even after reduction from the 18% levels under GST.

Sri Lanka, UAE, Singapore or any other country in Asia levies no tax on bunker fuel oil.

According to data issued by Platts, after the 18% GST was imposed on July 1, Mumbai bunker fuel prices moved from a $15/meric tonne discount to Colombo price in June to $20.30/ metric tonne in July, and $23.64/metric tonne in August. The Mumbai-Colombo 380 CST bunker fuel spread hit a high of $29/ metric tonne in September, before it plunged to $4.35/metric tonne in October.

Anoop Kalavath, partner, indirect tax, at Deloitte India said, The shipping firms already facing losses are likely to see their topline affected by around 2% and their losses widened, if the GST on bunker fuel is not brought down to zero level. The impact is equally felt by the Ports, oil marketing companies their joint venture partners, who are also the global contractors, and the small and medium scale enterprises involved in the last mile connectivity work for the supply of the bunker fuel at the sea. Freight constitutes 40-45% of Any shipping companies total cost. An increase of 5% would impact the margins drastically.

“The reduction in tax to previous levels should not be seen from the tax collection point of view alone, but also its impacts on the industry in terms of job creation and job displacement. Bunker fuel sales for Indian marketing companies has already gone down by 60% and now the joint venture partners are also evaluating options. It will further shift the jobs to other ports outside India,” Kalavath said.

India's GST Council has reduced the tax on the bunker fuel sales after the October 6 meeting in Guwahati to 5% from 18% earlier, however, the industry still wants it to be reduced to the pre-GST level to save the suffering Ports, oil marketing companies and even the shipping companies already under sever operational stress.

"Shipping companies margins are likely to be hit by 40-50% with an increase in 5% in GST on bunker fuel," an industry official said on conditions of anonymity.

- TradeBriefs Bureau - 

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