Taxation

Tonnage Taxation System: An Overview

The government of India has introduced the Tonnage tax system, and this scheme is optional for qualifying Indian Shipping Companies after meeting certain eligibility criteria put forth in the Income Tax Act. Tonnage taxation is the way of taxing the shipping companies based on the net tonnage of the entire fleet under operation or use by the company. Section 115V to 115VZC of the Income Tax Act covers the concept computation and applicability of the concept of Tonnage Taxation in India. This unique concept seems very straightforward but involves certain technicalities. This article aims to decode the Tonnage Taxation System in the country whilst giving a detailed overview of the topic.

Eligibility Criteria for Tonnage Taxation Scheme

To become eligible for paying the tonnage tax, the eligible company must own at least one qualifying ship, and the business such qualifying ship should be separate whose books of accounts are also required to be maintained separately.

What is a Qualifying Company?

According to section 115 VC of the Income tax act, any company that satisfies one of the following requirements can be regarded as a qualifying company for tonnage taxation.

1. If it is an Indian Company
2. The place of effective management in such a company is in India
3. It holds the ownership of at least one qualifying ship
4. The main object of the company is to carry out the business of operating ships

What are Qualifying Ships?

As per Section 115 VD of the Income Tax Act following have been categorised as Qualifying ships;

1. Sea-going ship/vessel of net tonnage equal to or more than  15
2. All the ships that are registered under the Merchant Shipping Act or Licensed obtained from DGS

General Exclusions from the Definition of Qualifying Ships: Tonnage Taxation

• All the harbor and river ferries
• All the offshore installations
• Any qualifying ship that was being used as a Fishing Vessel for a period of 30 days or more in the previous year.
• Any Pleasure Craft, any vehicle that has been created for recreational activities like Sports and Leisure.
• All the Factory ships- All the ships that provide processing of services in respect of fishing produce.
• A sea-going ship or vessel if the main purpose the ship serves is provision for goods and services that are normally provided on land.

Tonnage Taxation: Manner of Computation

Under section 115 VE, the following is the manner of computing the income generated from a qualified company and a qualifying ship.;

• The business of carrying out the ship has to be considered a separate business distinct from all the other businesses the company might be running.
• The books of such businesses are also kept separate from all the other businesses of the entity.
• The profit from the Tonnage businesses shall be computed distinctively from the profits and gains made from any other company businesses. Such profit or gain is taxable under the head Profit or Gain of Business or Profession.

Computation of Income- 115 VG

(1) The daily income of each qualifying ship shall be the daily tonnage income of each such qualifying ship multiplied by;

• The no. of days in the Previous Year or
• The no. of days in part of the previous year the ship has been operational as a qualified ship for only part of the previous year, as the case may be.

(2) The computation can be referred to via a table in the following manner;

Qualifying Ship	Daily Tonnage Income Amount
Upto 1000 tons	70 Rs. for each 100 tons
1000 to 10000 tons	Rs. 700 plus Rs. 53 for every 100 tons exceeding 1,000 tons
10000 to 25000 tons	Rs. 5,470 plus Rs. 42 for every 100 tons exceeding 10,000 tons
More than 25000	Rs. 11,770 plus Rs. 29 for every 100 tons exceeding 25,000 tons.

(3) In this chapter, “tonnage” refers to the ship’s tonnage as stated in the certificate issued in accordance with the Merchant Shipping Act of 1958¹.

(4) The tonnage must be rounded to the nearest multiple of 100 tonnes; any tonnage made up of kilos is disregarded for this calculation.

(5) No deduction or setoff shall be allowed in computing the income under this chapter, despite anything stated in any other section of this Act.

Section 115 VL: General Exclusion of Deduction and Set Off

Regardless of any other provisions of this Act, the following rules apply when calculating the income generated from tonnage of a tonnage tax company for any prior year (relevant previous year) for which it is subject to tax in accordance with this chapter: a) Sections 30 to 43B apply as if each loss, allowance, or deduction mentioned therein that relates to or is allowable for any prior year had been fully implemented for that prior year itself; b) No loss is allowed.

Section 115VM: Loss Exclusion:

As if the losses had been offset against the pertinent shipping income in any prior year when the company was enrolled in the tonnage taxation scheme, Section 72 shall apply to any losses that a company incurred prior to electing the tonnage tax scheme, and that is attributable to its tonnage tax business.

Exclusion from Section 115JB’s provisions:

For the purposes of section 115JB, the book profit or loss resulting from the operations of a tonnage tax company from the qualified ships shall be disregarded.

Duration of the Tonnage Tax Option under Section 115VQ:

• A tonnage tax scheme option, if granted, is in effect for ten years from the day it is exercised. It is calculated based on the assessment year pertinent to the year before the year the option was exercised.
• A tonnage scheme option will expire after the assessment year for the prior year in which:
  • The qualifying company ceases to be a qualifying company;
  • A default is made in complying with the provision regarding the transfer of profit to the Tonnage Tax Reserve Account and minimum requirements of training for the tonnage company; and
  • The qualifying company provides the Assessing Officer with a written declaration to the effect that the provision regarding the transfer of profit to the Tonnage Tax Reserve Account and minimum training requirement for.
• And according to the other clause of this Act, the company’s profit and gain from operating eligible ships must be calculated.

Profit Transfer to Tonnage Tax Reserve Account—Section 115VT

The Tonnage Tax Reserve Account must receive at least 20% of the book profit generated by the operations of qualified ships.

Please take note that the company must use the money credited to the Tonnage Tax Reserve Account before the end of the eight years that follow the previous year in which it was credited for the following purposes:

(a) Purchasing a new ship for the company’s business; and

(b) Up until the purchase of a new ship, operating qualifying ships for business purposes other than to distribute as dividends or profits.

A tonnage tax business must adhere to the minimum training standards set by the Director General of Shipping and announced in the official Gazette by the Central Government, as per Section 115VU of the Tonnage Tax Company Act.

Tax Avoidance—Section 115VZB

The tonnage taxation can be avoided in the following manner by the company

1. When a tonnage tax company is a party to any transaction or arrangement that constitutes an abuse of the tonnage tax system, the tonnage tax scheme shall not be applicable.
2. If a tax benefit was achieved by
   • a person other than a tonnage company; or
   • a tonnage tax company in respect of its non-tonnage tax activities as a result of entering into or applying a transaction, arrangement, or arrangement, it will be deemed abusive.

Section 115VZC: Exclusion from Tonnage Taxation Scheme:

1. If a tonnage tax company is a party to a transaction or agreement covered by section 115VZB, the Assessing Officer must exclude that firm from the tonnage tax scheme by written order. The Assessing Officer shall provide such a company with a chance to show cause why it should not be exempt from the tonnage tax scheme by giving notice to the company on the date and time stated in the notice. Furthermore, an order must be issued with the Principal Chief Commissioner’s or Chief Commissioner’s prior consent.
2. When the company demonstrates to the Assessing Officer’s satisfaction that the transaction or arrangement was a genuine commercial transaction and had not been entered into to achieve a tax benefit under this chapter, the provision of this section shall not apply.
3. The option for the tonnage tax scheme will expire on January 1 of the year following the year in which the transaction or arrangement was made if an order has been passed by the Assessing Officer removing the tonnage tax company from the tonnage tax scheme. The ITAT will hear an appeal against the expulsion order issued by the Assessing Officer pursuant to Section 115VZC.

Conclusion

The government of India has implemented the Tonnage Taxation System to tax earnings from shipping activities made by an Indian company. An eligible Indian shipping business may choose to participate in this scheme if they feel it will benefit them. An organisation is eligible to participate in the plan once it has met certain requirements. For a corporation to be eligible for the Tonnage Tax Scheme, at least one qualifying ship must be present, and the qualifying ship’s operations must be run independently. For the same, separate accounts must be maintained.

Read Our Article: Read About the Procedure for Appeal Under The Income Tax Act

1. https://www.indiacode.nic.in/handle/123456789/1562?sam_handle=123456789/1362