• 2023 February 15

    Zero VAT is not a silver bullet

    A zero VAT rate is to be set for ship repair companies of Russia. The industry representatives welcome this step but say that is not sufficient for the revival of ship repair – a comprehensive approach is required.

    What is proposed?

    RF Government has developed amendments into the Tax Code which foresee a zero VAT rate for ship repair yards engaged in dock and yard repair of ships if they allocate at least 20% of revenues for the development throughout a 7-year period. Such an obligation is to be stipulated by the state agreement.

    As of today, zero VAT is applied to services (including ship repair) covering sea-going vessels, inland navigation vessels and vessels of mixed sea/river class and provided in ports as well as pilotage, classification and certification services. VAT of 20% is applied to ship repair conducted in docks and at shipyards and repair of vessels that are not decommissioned and placed at the berths of shipyards, not ports.

    Prime Minister Mikhail Mishustin: “The President has set a task to ensure maximum of operations on equipment and repair of ships to be conducted within the country. In pursuance of this task the Government has prepared amendments into the Tax Code … In the result, the saved resources will let the business enhance its investment capabilities, invest more in long-term projects, purchase advanced and costly equipment needed for servicing modern high-tech ships and equipment.”

    In Russia, ship repair services are currently offered by 57 organizations. According to the strategy for the development of shipbuilding industry up to 2035, Russia numbers about 50 large and over 100 mid-size and small ship repair organizations. Most of them are focused on warships. 

    What’s the problem?

    It is not a secret that domestic ship owners prefer having their ships repaired abroad, for example in Turkey, due to a variety of reasons. First of all, there are facilities available there while Russia lacks docks and that affects the time of ship repair implementation.

    Sergey Smirnov, Director of the Association of Oil and Gas Suppliers: “There is no problem of docks shortage there (in Turkey – Ed.). It often happens in Russia: you come but the dock is busy with an emergency repair or a state defense ... The situation in Turkey is principally different: if a shipowner signs a contract with a company and the dock is occupied for some reason this ship is placed in another dock without any problems. There are hundreds of docks there. So, we need not one or two docks, we need dozens of docks in each region.”

    However, insufficiency of docks is not the most difficult problem. Nikolay Avtutov, First Deputy Director of Marine Engineering Bureau-SPb, believes that any marine yard in Russia can assemble pontoons and then build a dock.

    Problems can arise only with monolithic docks which can only be built by large shipyards such as SC Zvezda or Zaliv. VAT privileges will certainly contribute to the development of facilities.

    Ship components and spare parts present a more complicated problem which has aggravated incredibly with the sanctions. As many docks as needed can be built and as many benefits as required can be provided to ship repair companies, but nothing can be repaired without ship components available in the necessary amount, range and at logistically accessible points. To establish the production of ship components at affordable cost in Russia, large-scale production is needed with export opportunities highly advisable. But this task goes far beyond ship repair.

    Comment of United Shipbuilding Corporation (USC) for IAA PortNews: “We are waiting for and important decision to set zero VAT for ship repair. Setting a zero value-added tax rate for ship repair on the condition of investment in development is very timely. However, this measure can solve only part of the ship repair problems. Other measures are needed to ensure the domestic production of components required for repair. As a summary, it should be noted that the industry needs a comprehensive approach to state support measures. Further development of the leasing programme is needed as well as subsidizing of the Far East shipyards and enterprises producing sophisticated products and developing prototypes. Perhaps, it is worth thinking about the fundamental law for the industry to serve as a basis for the development of shipbuilding and production of ship components.

    What is to be done?

    Obviously, it is impossible to revive ship repair in Russia without “fitting” it into a wider programme o the development of the production of ship components while the latter is only possible in conjunction with the development of shipbuilding and all related industries. In an ideal scenario, each sea basin of Russia should have the required number of docks and storage centers with a sufficient quantity of components and spare parts on stock to supply vessels of certain types which are in operation whichin the basin. In our opinion, that is difficult to ensure without planning at the state level.

    Recommended to read: Neglected shiprepair

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Vitaliy Chernov