Introduction to Tonnage Tax Scheme

Tonnage Tax Scheme– Government of India has introduced Tonnage Tax System (TTS) for taxation of income from shipping activities by an Indian Company.

Tonnage Tax Scheme is an optional scheme for qualifying Indian shipping company. Only after satisfying certain conditions a company is eligible to be enrolled under the scheme.

Eligibility Criteria for Tonnage Tax Scheme:-

A company is expected to own at least one qualifying ship to be eligible for Tonnage Tax Scheme, and that the business of qualifying ship has to be treated as a separate business. Separate accounts must be maintained for the same.

Hence, the three main criteria for tonnage tax scheme are:-

  • It is a qualifying company
  • The company operates ships
  • The company operates a qualifying ship or ships.

What is a Qualifying Company?

A qualifying company should be An Company, having atleast one qualifying ships and it should carry out the business that are related to qualifying ships. The place of effective management of the company should be in India.

By default the company owning a ship will be regarded as an operator. Even if the ship or part of it is chartered by the company, it can be considered as operating ships, but with the exception of being chattered out by it in a bareboat charter cum demise terms, or on bareboat charter terms for a period exceeding 3 years.

 What is a Qualifying Ship?

Qualifiying ship under the tonnage tax scheme satisfied the following criteria’s:

It is a sea going ship or a vessel of 15 net tonnage or more.

A ship that is registered under the Merchant Shipping Act , 1958

For a ship that is registered outside India the license has to be issued by the director general of shipping.Ship should hold an effective certificate that indicates its net tonnage

The profit from the business operating using the qualifying ship will not be applicable for Minimum Alternative Tax provisions.

A company which opts for this scheme is neither allowed any set off of loss nor any depreciation and a company can be expelled from Tonnage Tax Scheme under any circumstances, and companies need to pay taxes if they are faced with losses in the previous year.

Important Cruxes and Provisions on Tonnage Tax:-

Qualifying Company – Section 115VC:

(a) it is a Indian company;

(b) the place of effective management of the company is in India;

(c) its own at least one qualifying ship; and

(d) the main object of the company is to carry on the business of operating ships.

Qualifying Ships- Section 115 VD

(1) Sea going ship/vessel of Net tonnage Equal or more than 15 .

(2) Ship registered under Merchant shipping Act or Licensed obtained from DGS.

Exclusions from the definition of Qualifying Ships-

(1) a sea going ship or vessel if the main purpose for which it is used is the provisions of goods or services of a kind normally provided on land;

(2) fishing vessel;

(3) factory Ship- the ship providing processing services in respect of fishing produce;

(4) pleasure craft- the ship whose primary use is for the purpose of sport and recreation;

(5) harbour and river ferries;

(6) offshore installations;

(7) a qualifying ship used as a fishing vessel for a period of more than thirty days during a previous year.

Manner of Computation of Income under Tonnage Tax Scheme- Section 115 VE:-

(1) The business of operating qualifying ships shall be considered as separate business distinct from all other activities or business carried on by the company.

(2) The profit from tonnage business shall be computed separately from the profit and gains fro any other business and shall be taxable under the Head PGBP

Computation of Tonnage Income- Section 115 VG:

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

(a) the number of the day in previous year; or

(b) the number of days in part of the previous year in case the ship is operated by the company as a qualifying ship for only part of the previous year, as the case may be.

(2) The daily tonnage income of a qualifying ship having tonnage referred in column (1) of the table below shall be the amount specified in the corresponding entry in column (2) of the table;

Qualifying ship having Net tonnageAmount of daily tonnage Income
Upto 1,000Rs. 70 for each 100 tons
Exceeding 1,000 but not more than 10,000Rs. 700 plus Rs. 53 for each 100 tons exceeding 1,000 tons
Exceeding 10,000 but not more than 25000Rs. 5,470 plus Rs. 42 for each 100 tons exceeding 10,000 tons
Exceeding 25,000 tonsRs. 11,770 plus Rs. 29 for each 100 tons exceeding 25,000 tons.

(3) For this chapter, the tonnage shall mean the tonnage of a ship indicate d in the certificate issued under the Merchant Shipping Act, 1958.

(4) The tonnage shall be rounded off to the nearest multiple of hundred tons and for this purpose any tonnage consisting of kilograms shall be ignored.

(5) Notwithstanding anything contained in any other provision of this Act, no deduction or set off shall be allowed in computing the tonnage income under this chapter.

General Exclusion of Deduction and Set off, ETC- Section 115 VL:

Notwithstanding anything contained in any other provision of this Act, in computing the tonnage income of tonnage tax company for any previous year (Relevant previous year) in which it is chargeable to tax in accordance with this chapter –

(i) Section 30 to 43B shall apply as if every loss, allowance or deduction referred to therein and relating to or allowable for any of the relevant previous year, had been given full effect to for that previous year itself;

(ii) no loss referred to in section 70 or section 71 or section 72 or section 72A, in so far as such loss relates to the business of operating qualifying ships of the company, shall be carried forwarded or set off where such loss relates to any of the previous years when the company under the tonnage tax scheme;

(iii) no deduction shall be allowed under Chapter VI-A in relation to the profit and gain from the business of operating qualifying ship; and

(iv) in computing the depreciation allowances under section 32, the written down value of any assets used for the purpose of the tonnage tax business shall be computed as if the company has claimed and has been actually allowed the deduction in respect of depreciation for the relevant previous years.

Exclusion of Loss- Section 115VM:

Section 72 shall apply in respect of any losses that have accrued to a company before its opting for tonnage tax scheme and which are attributable to its tonnage tax business, as if such losses had been set off against the relevant shipping income in any previous year when company is under the tonnage tax scheme.

Exclusion from provision of – Section 115JB:

The book profit or loss derived from the activities of a tonnage tax company, from the qualifying ships, shall be excluded from the book profit of the company for the purpose of the section 115JB.

Period for which tonnage tax option remain in force – Section 115VQ:

(i) An option for tonnage tax scheme, after it has been approved shall remain in force for a period of ten years from the date on which such option has been exercised and shall be taken into account from the assessment year relevant to the previous year in which such option is exercised.

(ii) An option for tonnage scheme shall cease to have effect from the assessment year relevant to the previous year in which-

(a) the qualifying company cease to be qualifying company;

(b) a default is made in complying with the provision regarding transfer of profit to Tonnage Tax Reserve Account and minimum training requirement for tonnage company;

(c) the qualifying company furnishes to the Assessing officer, a declaration in writing to the effect that the provision of this chapter may not be applicable to it;

(d) the tonnage tax company is excluded from the tonnage tax scheme under section 115VZC.

And the profit and gain of the company from the business of operating qualifying ships shall be computed in accordance with the other provision of this Act.

Transfer of profit to Tonnage Tax Reserve Account- Section 115VT:

An amount not less than 20% (percent) of the book profit derived from the business of qualifying ships shall be credited to the Tonnage Tax Reserve Account.

Further, please note that, the amount credited to the Tonnage Tax Reserve Account shall be utilised by the company before the expiry of a period of eight years next following the previous year in which the amount was credited—

(a) for acquiring a new ship for the purposes of the business of the company; and

(b) until the acquisition of a new ship, for the purposes of the business of operating qualifying ships other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

Minimum Training requirement for Tonnage Tax Company- Section 115VU:

A tonnage tax company shall comply with the minimum training requirement specified by the Director General of Shipping and notified in the official Gazette by the Central Government.

Avoidance of Tax- Section 115VZB

(1) The tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amount to an abuse of the tonnage tax scheme

(2) A transaction or arrangement shall be considered an abuse if the entering into or the application of such transaction or arrangement result or resulted, in a tax advantage being obtained for-

(i) a person other than tonnage company; or

(ii) a tonnage tax company in respect of its non tonnage tax activities.

Exclusion from Tonnage Scheme- Section 115VZC:

(1) Where a tonnage tax company is a party to any transaction or arrangement referred to in section 115VZB, the Assessing officer shall, by an order in writing exclude such company from tonnage tax scheme.

Provided that an opportunity shall be given by the Assessing Officer, by serving a notice calling upon such company to show cause, on a date and time to be specified in the notice, why it should not be excluded from the tonnage tax scheme

Provided further that no order shall be passed without the previous approval of the Principal Chief Commissioner/Chief Commissioner.

(2) The provision of this section shall not apply where the company shows to the satisfaction of the Assessing Officer that the transaction or arrangement was a bonafide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this chapter.

(3) Where an order has been passed by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme, the option for tonnage tax scheme shall cease to be in force from the first day of the previous year in which the transaction or arrangement was entered into.

An appeal against the order of the expulsion passed under section 115VZC by the Assessing Officer shall lie before the ITAT.