Cabotage means reserving coastal trade for national flag vessels; in other words, it refers to the practice of imposing restrictions for movement of domestic cargo by foreign flag vessels.
Cabotage is applied in the coastal trade or the internal trade from one port to another in India, which is generally carried out by ships of lower draft/depth. Coastal movement require the use of smaller sized ships due to draft (depth), waterway width and navigational restrictions, as well as the availability of appropriate loading and handling facility at the port.
Websters Dictionary defines cabotage as "trade or transport in coastal waters or airspace or between two points within a country" or the "right to engage in cabotage". The word has its roots in Spanish and French. Even though the word per se refers to coastal trade, over a period of time cabotage acquired the meaning of right to coastal trade.
Cabotage is a sovereign right of the country.
Cabotage restrictions are applicable in most countries to protect the domestic shipping industry from foreign competition as well as for the purpose of national security. China and USA are known to impose absolute cabotage restrictions.
However, the contrary view is that if coastal ships are less in number, cabotage restrictions do not do any good for the nation. For instance, the growth of coastal fleet in India is not viewed as impressive. When there are not enough domestic coastal vessels, imposing cabotage, discourages coastal transport due to the procedural lags.
As far as India is concerned, with her long coastline, increasing the use of coastal waterways can considerably reduce the pressure on roads / highways created by freight movements. For instance, India's road density at 1.48 kms/sq. km of area as on 31 March 2012, is higher than that of USA (0.67km/ sq km), China (0.42 km/ sq. km) and Brazil (0.19 km/sq.km). However, the surfaced road length in India is only 55.46% of the total road length which was much lower as compared to France, Japan, Korea, UK and USA. Further, most highways in India are narrow and congested with poor surface quality, and 40 percent of India's villages do not have access to all-weather roads. Since much of the freight traffic happens by roads, taking off this traffic to coastal ships can substantially improve the quality of road transport in India. Further, water transport has its own coast advantages. It is also argued that international competition would bring about greater efficiency in the domestic operations.
There is also a view that cabotage on carriage of empty and/or transhipment containers should be partially relaxed with certain conditions. This may facilitate the efficient movement of containers as well as ease congestion at ports and port storage.
Domestic players estimate that the operating cost of Indian flag vessels is around 35-40% higher than foreign flag vessels, primarily due to the strict fiscal regime on Indian shipping lines, and if the cabotage restriction is removed then the logistics costs for end customer will be at least 40-45% cheaper on the sea leg of the transport. There is also a contrary view that Indian shipping lines have to pay various taxes which are not paid by foreign shipping lines and this is what makes the latter competitive.
Some argue for relaxation of cabotage benefit on reciprocal basis with the countries where the principal offices of the foreign lines are located.
Another view is that Cabotage restrictions should be relaxed for only special vessels such as Roll on- Roll off vessels (RO-RO) which carry cars trucks etc., Hybrid RO-RO, RO-Pax (which can carry both cargo and passengers), Pure Car Carriers, Pure Car and Truck Carriers, LNG Vessels and Over-Dimensional Cargo or Project Cargo Carriers which are in short supply.
Legal backing for Cabotage in India
There is no absolute cabotage restriction in India. The policy of cabotage restriction for movement of domestic cargo by foreign flag vessels along the coast of India is governed as per Section 407 of the Merchant Shipping Act, 1958, as amended from time to time.
Section 407 (2) of the Act enables granting of licence for such coastal trade in India to a foreign flag vessel for a specified period or voyage by the Director General of Shipping (DGS) subject to such conditions as it deems fit. However, the Act does not use the word cabotage.
Also, Section 407 (3) of the Act empowers the Central Government to relax cabotage restriction in respect of any part of the coastal trade of India subject to such conditions and restrictions as it deems fit. For instance, cabotage restrictions were removed during 1992-1997. Later, in the wake of congestion at Indian ports in January, 2005, cabotage restrictions were again relaxed to allow movement of containers by foreign ships between Jawaharlal Nehru Port Trust (JNPT)/Mumbai Port to any other Indian Port or vice versa for a period of one year. Cabotage restriction for the International Container transhipment terminal (ICTT) Vallarpadam, Cochin has been relaxed for transhipment (offloading a container from one ship to another, without entering the port/country, where the transhipment facility is offered) of export –import (EXIM) containers for a period of three years in September, 2012.
How the rights of domestic shipping companies are protected?
The procedure for grant of the license requires the foreign flag shipping company to approach the Indian National Shipowners' Association (INSA) for obtaining a NOC [No Objection Certificate] prior to applying for the license to the DGS. On receipt of the request, INSA floats enquiries amongst Indian flag vessels for carriage of such coastal cargo. In the event of an Indian flag vessel showing interest and offering competitive rates in the carriage of the said domestic cargo, such Indian flag vessel can exercise the Right of First Refusal (RoFR) and in such case, the NOC is denied by INSA. In case no Indian flag vessel is available or no offer thereof is made, NOC is granted and accordingly licence is issued by DGS to the foreign flag vessel for coastal voyage.
Recent Relaxations in cabotage
Ministry of Shipping released a draft policy note on relaxation of cabotage restrictions on 3 July 2015 and based on the same, some of the existing restrictions have been eased out. The Central Government decided to relax cabotage for special vessels such as Roll-On Roll-Off (Ro-Ro), Hybrid Roll-On Roll-Off (Hybrid Ro-Ro), Roll-On Roll-Off cum Passenger (Ro-Pax), Pure Car Carriers, Pure Car and Truck Carriers, LNG vessels and Over-Dimensional cargo or Project Cargo Carriers for a period of five years on 14 September 2015.
The operational cost of Indian vessels is estimated to be higher than that of foreign vessels due to duties and taxes on bunker fuel, income tax on seafarer's income, and other taxes paid by Indian flag vessels. To make Indian vessels more affordable to operate and strengthen coastal shipping in India, Government of India exempted Customs and Excise Duty leviable on specified bunker fuels (fuel used by the ship) used in Indian flag vessels for transportation of EXIM and empty containers between two or more ports in India. In the Union Budget 2015-16, Service Tax abatement rate for transportation of goods in sea vessels has been raised from 60% to 70%.
On 17 March 2016, Government relaxed cabotage restrictions for ports which transship at least 50% of the container handled by them. With the cabotage relaxation, foreign vessels can also transport EXIM and empty containers from any port in India to transshipment port and vice versa, in addition to Indian vessels. The spare capacity of the foreign flag ships which could not be utilized earlier due to cabotage restrictions would now be gainfully utilized enabling them to offer competitive container slot rates to exporters and importers leading to competition led efficiency in container transportation and lower logistic costs for the shippers.It would enable shipping lines to consolidate Indian EXIM and empty containers at transshipment ports in India for onward transportation to destination ports by main shipping lines. The container port seeking cabotage relaxation for transshipment port would have to achieve transshipment of 50% or more of the EXIM and Empty cargo handled in one year. New transshipment ports will have a gestation period of one year and shall have to achieve the stipulated transshipment traffic of 50% of the traffic handled in the second year. If the container port is able to achieve transshipment traffic of 50% of the cargo handled, the cabotage relaxation for such container port will continue. Inability of the port to transship at least 50% of the containers handled in a year would result in revocation of the said relaxation. The port whose relaxation is revoked would not be considered for cabotage relaxation for next three years.
As per existing regulatory framework, a foreign ship can load an empty or laden container from one place or port in lndia and discharge at other place or port in lndia, only under a license issued by the Director General of Shipping under Section 407 of the Merchant Shipping Act, 1958. On May 21, 2018 the Ministry of Shipping issued a notification lifting such restrictions on foreign registered vessels on transportation of loaded or empty containers between Indian ports. With the change, effective immediately, foreign carriers can transport laden export-import containers for transhipment and empty containers for repositioning between Indian ports without any specific permission or license.
The notification of 21 May 2018 was issued in exercise of powers under Section 407(3) Merchant Shipping Act, 1958 and essentially stated that the provisions of sub-section (1) of Section 407 of Merchant Shipping Act, shall not apply to the following category of ships, which may be engaged for the coastal trade of India:
1. Foreign flag ships engaged, in full or in part, for transportation of EXIM laden containers for transhipment; and
2. Foreign flag ships engaged, in full or in part, for transportation of empty containers.
This is subject to the following conditions
a. The laden container is consigned on a through Bill of Lading to or from a port outside India for the purposes of transhipment at an Indian port;
b. The laden container is loaded or unloaded at a port in India for transhipment only; and
c. That the laden container is covered by the arrival manifest or departure manifest, as the case may be, for transhipment.
d. Further, information has to be shared with Director General of Shipping at least 24 hours prior to sail of ship from the port in India.
e. Indian law enforcement agencies including inter-alia Indian Navy, Coast Guard, State Maritime police and Customs, shall be allowed to board such ships any time in the sea for ascertaining the bonafide credentials of the said ships/crew.
The Notification of 21 May 2018 gives detailed explanations for implementing this. Movement of cargo by containers has been rising continuously and is presently more than 20% of India’s total EXIM trade volumes. Container business has rapidly evolved from point-to-point to hub-and-spoke model. Thus the containers from smaller ports are shipped via feeder vessels and then aggregated at a trans-shipment port from where they are loaded in a bigger container liner for transhipment or mainline port. Such a model has not fully evolved in India and this has resulted in almost 33% of Indian container cargo getting transhipped at foreign ports. The extent of transhipment has been increasing year on year and has increased from 26% in 2007-08 to 33% in 2016-17 (lndian Ports Association), leading to loss of revenue and jobs in India.
Vide Notification No.38 /2018 - Customs (N T ) dated 11th May 2018, the Central Board of Indirect Taxes and Customs has allowed authorized sea carriers for carrying imported goods, export goods, coastal goods or goods meant for foreign transit or foreign transhipment subject to delivery of an integrated departure and arrival manifest to the proper officer electronically.
Ministry of Shipping's draft Policy Note on Relaxation of Cabotage Restrictions