Compliance Requirements under India's Tonnage Tax Regime : Clause 232(21) of Income Tax Bill, 2025 vs. Section 115VW of the Income Tax Act, 1961

Clause 232 Certain conditions for applicability of tonnage tax scheme.

Income Tax Bill, 2025

Introduction

The Indian tonnage tax regime, introduced to provide a competitive and simplified taxation framework for shipping companies, has undergone significant legislative evolution. The Income Tax Bill, 2025 proposes to overhaul and update the existing provisions governing the tonnage tax scheme, with Clause 232(21) specifically addressing the conditions for the applicability of the scheme. This clause is the successor to Section 115VW of the Income-tax Act, 1961, which, together with Rule 11T of the Income-tax Rules, 1962, established the framework for maintenance and audit of accounts by tonnage tax companies.

This commentary provides an in-depth legal analysis of Clause 232(21), examining its structure, purpose, and implications. It further compares and contrasts the new provision with Section 115VW and Rule 11T, highlighting continuities, changes, and potential legal and practical ramifications for stakeholders in the shipping industry.

Objective and Purpose

The legislative intent behind both the earlier Section 115VW and the proposed Clause 232(21) is to ensure transparency, accountability, and regulatory oversight in the operation of the tonnage tax scheme. The tonnage tax regime is a concessional tax arrangement, and as such, it is imperative that only genuinely eligible shipping companies benefit from it. The core objective of requiring maintenance of separate books of account and submission of an accountant's report is to:

• Prevent tax base erosion through improper reporting or mixing of qualifying and non-qualifying business activities.
• Enable effective audit and verification by tax authorities.
• Ensure compliance with scheme conditions as a prerequisite for availing the concessional tax benefit.

The historical background to these requirements can be traced to international best practices in shipping taxation, and the need to align India's regime with those of major maritime jurisdictions, thereby enhancing the competitiveness of Indian shipping companies.

Detailed Analysis of Clause 232(21)

Text of Clause 232(21)

An option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a tax year unless such company-

1. maintains separate books of account in respect of the business of operating qualifying ships; and
2. furnishes, before the specified date referred to in sections 63, the report of an accountant, in the prescribed form, duly signed and verified by such accountant.

Breakdown and Interpretation

1. Maintenance of Separate Books of Account

Clause 232(21)(a) mandates that a tonnage tax company must maintain separate books of account for its business of operating qualifying ships. This requirement is crucial for the following reasons:

• Segregation of Income: It ensures that income derived from qualifying shipping activities is clearly distinguishable from income arising from other business activities, which may not be eligible for tonnage tax treatment.
• Prevention of Abuse: By maintaining distinct accounts, companies are prevented from artificially inflating shipping income or misallocating expenses, thereby safeguarding the integrity of the regime.
• Ease of Audit: Separate books facilitate easier and more effective auditing by tax authorities, reducing the risk of disputes and enhancing compliance.

2. Furnishing of Accountant's Report

Clause 232(21)(b) stipulates that the company must furnish a report of an accountant in the prescribed form, duly signed and verified, before the specified date referred to in section 63. The key elements here are:

• Form and Verification: The form and manner of verification are to be prescribed, likely mirroring the requirements of Form 66 u/r 11T (discussed below).
• Specified Date: The "specified date" aligns with the due date for filing returns, ensuring timely compliance and audit.
• Role of Accountant: The accountant's report serves as an independent certification of compliance with the scheme's conditions, lending credibility to the company's claim for tonnage tax benefits.

3. Negative Condition: Inapplicability of Scheme

The clause is structured as a negative condition precedent: if a company fails to fulfill either of the requirements, its option for the tonnage tax scheme "shall not have effect" for that tax year. This means:

• The company will be taxed under normal provisions, losing the concessional benefit for that year.
• There is no scope for condonation or relaxation unless specifically provided elsewhere.
• The requirement is annual and recurring, not a one-time compliance.

4. Cross-Reference to Other Provisions

The reference to the "specified date referred to in sections 63" (likely the section prescribing due dates for return filing) ties this requirement to the broader compliance framework of the Income Tax Act. This harmonization ensures administrative consistency.

Practical Implications

For Shipping Companies

• Compliance Burden: Companies must invest in robust accounting systems capable of maintaining separate books for qualifying activities, which may involve additional costs and administrative effort.
• Risk of Disqualification: Even inadvertent lapses in compliance could result in loss of the tonnage tax benefit for an entire tax year, with potentially significant tax liabilities.
• Audit Readiness: The requirement for an independent accountant's report compels companies to maintain high standards of record-keeping and internal controls.

For Tax Authorities

• Enhanced Oversight: The provision equips authorities with clear documentation to assess compliance and detect abuse.
• Standardization: Prescribed forms and timelines ensure uniformity in compliance and facilitate data-driven scrutiny.

For Accountants

• Expanded Role: Accountants are entrusted with significant responsibility, as their certification is a condition precedent for the scheme's applicability.
• Potential Liability: Given the consequences of non-compliance, accountants must exercise due diligence and professional skepticism.

Comparative Analysis: Clause 232(21) vs. Section 115VW and Rule 11T

Section 115VW of the Income-tax Act, 1961

An option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a previous year unless such company-

1. maintains separate books of account in respect of the business of operating qualifying ships; and
2. furnishes, before the specified date referred to in section 44AB, the report of an accountant, in the prescribed form duly signed and verified by such accountant.

The section further clarifies that "accountant" shall have the same meaning as in section 288(2) Explanation, ensuring only qualified professionals can issue the report.

Rule 11T of the Income-tax Rules, 1962

The report of audit of accounts of a qualified company which is required to be furnished under clause (ii) of section 115VW shall be in Form No. 66.

Key Points of Comparison

Aspect	Clause 232(21) of the Income Tax Bill, 2025	Section 115VW of the Income-tax Act, 1961	Rule 11T of the Income-tax Rules, 1962
Maintenance of separate books	Mandatory for qualifying shipping business	Mandatory for qualifying shipping business	Not addressed (procedural form only)
Accountant's report	Mandatory, in prescribed form, before specified date (section 63)	Mandatory, in prescribed form, before specified date (section 44AB)	Form No. 66 prescribed
Specified date	As per section 63 (likely aligned with return filing)	As per section 44AB (audit report due date)	Not addressed (relies on section)
Definition of accountant	Not specified in this clause (may be elsewhere in Bill)	Explicit cross-reference to section 288(2) Explanation	Not addressed
Form and verification	To be prescribed	To be prescribed	Form No. 66 specified
Consequence of non-compliance	Option for tonnage tax scheme "shall not have effect" for that year	Option for tonnage tax scheme "shall not have effect" for that year	Not addressed

Similarities

• Both Clause 232(21) and Section 115VW impose identical core requirements for separate books and accountant's report as conditions precedent for availing the tonnage tax scheme.
• The consequence of non-compliance-loss of the tonnage tax option for the relevant year-is consistent across both provisions.
• Both require the accountant's report to be in a prescribed form, with Rule 11T operationalizing this requirement via Form No. 66.

Differences and Evolution

• Reference to Specified Date: Clause 232(21) refers to the specified date u/s 63 (presumably the new section governing return filing due dates), while Section 115VW refers to section 44AB. This is an administrative update, harmonizing with the new structure of the Income Tax Bill, 2025.
• Potential Omission of "Accountant" Definition: Section 115VW explicitly cross-refers to the definition of "accountant" in section 288(2) Explanation. Clause 232(21) does not do so within the clause, possibly relying on a general definition elsewhere in the Bill. This could raise interpretative issues unless clarified in the Bill or Rules.
• Procedural Modernization: The Bill's language is updated to reflect changes in the tax administrative framework, such as the new section references and potentially revised forms and timelines.
• Prescriptive vs. Enabling Language: The new clause uses "in the prescribed form," enabling the Central Board of Direct Taxes (CBDT) to update forms and procedures without legislative amendment.

Rule 11T : Procedural Implementation

Rule 11T operationalizes the requirement for the accountant's report by prescribing Form No. 66. It is likely that the Bill's reference to "prescribed form" will be implemented through a similar rule, ensuring continuity in audit procedures.

Ambiguities and Issues

• Definition of "Accountant": Absence of an explicit definition in Clause 232(21) may create interpretative uncertainty unless the Bill or Rules clarify that only chartered accountants (as per section 288(2) Explanation) are eligible.
• Scope of "Separate Books": Neither provision specifies the level of detail or format required for "separate books," potentially leading to disputes on sufficiency of compliance.
• Condonation of Delay: There is no explicit provision for condonation of delay or rectification of procedural lapses, which could result in harsh consequences for minor or technical defaults.

Practical Implications of the New Clause

Legal Certainty and Compliance

The new clause, by largely mirroring the existing requirements, provides continuity and legal certainty for shipping companies. However, the updated cross-references and enabling language for prescribed forms may require companies to update their compliance protocols.

Administrative Flexibility

By referring to "prescribed forms" and "specified dates," the Bill allows the CBDT to adapt procedures and timelines in response to technological or administrative developments, such as e-filing or digital audit reports.

Potential for Dispute

Any ambiguity in the definition of "accountant" or the sufficiency of separate books could give rise to litigation. It is recommended that the Rules or circulars provide detailed guidance to minimize disputes and ensure consistent application.

Comparative Perspective: International Shipping Tax Regimes

Many maritime jurisdictions, such as the United Kingdom, Singapore, and Greece, have similar requirements for separate accounts and independent audit as conditions for tonnage tax eligibility. The Indian framework, as updated in the 2025 Bill, remains broadly aligned with these international best practices, thereby supporting the competitiveness of Indian shipping companies in the global market.

Conclusion

Clause 232(21) of the Income Tax Bill, 2025, represents a continuation and modernization of the core compliance requirements underpinning the tonnage tax regime. By mandating the maintenance of separate books and the furnishing of an accountant's report as conditions precedent, the provision seeks to ensure that the concessional tax benefit is available only to bona fide and compliant shipping companies. The clause is largely consistent with the earlier Section 115VW and Rule 11T, with necessary administrative updates to reflect the evolving tax framework.

Going forward, it would be beneficial for the legislature or the CBDT to clarify any ambiguities regarding the definition of "accountant," the format and detail required for separate books, and the scope for condonation of technical lapses. Such clarifications would enhance legal certainty, reduce the risk of disputes, and support the effective administration of the tonnage tax scheme.

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Full Text:

Clause 232 Certain conditions for applicability of tonnage tax scheme.

 

Dated: 28-5-2025