Interpreting Special Provisions for Shipping Companies : Clause 235 of the Income Tax Bill, 2025 Vs. Section 115V of the Income-tax Act, 1961

Clause 235 Interpretation.

Income Tax Bill, 2025

1. Introduction

Clause 235 of the Income Tax Bill, 2025, and Section 115V of the Income-tax Act, 1961, both serve as definitional provisions for the special regime governing the taxation of shipping companies in India. These definitions are foundational for the operation of the tonnage tax scheme, a special method of computing profits and gains from the business of operating ships, designed to promote the Indian shipping industry by providing clarity and certainty in tax liability. The importance of such definitional sections cannot be overstated, as they set the boundaries of eligibility, scope, and application for the entire scheme.

The 2025 Bill's Clause 235 is intended to update, clarify, and, in some respects, expand upon the framework established u/s 115V. This commentary will provide a detailed analysis of each major definition within Clause 235, compare it with its counterpart u/s 115V (including recent amendments), and discuss the implications for stakeholders and the broader policy context.

2. Objective and Purpose

The legislative intent behind both Clause 235 and Section 115V is to provide a clear, uniform set of definitions to facilitate the operation of the tonnage tax scheme. The tonnage tax regime was introduced in 2004 to offer shipping companies an alternative to the traditional corporate tax system, thereby enhancing the competitiveness of Indian shipping companies and aligning domestic law with international best practices.

The definitional clarity ensures that only genuine shipping activities benefit from the scheme, preventing misuse while providing certainty to taxpayers and administrators. The inclusion of new terms and refinement of existing ones in Clause 235 reflects the evolving nature of the shipping industry, regulatory environment, and legislative policy.

3. Detailed Analysis of Key Provisions

a) "Bareboat Charter" and "Bareboat Charter-cum-Demise"

Both Clause 235(a) and Section 115V(a)-(b) define "bareboat charter" as the hiring of a ship or inland vessel for a stipulated period, granting the charterer possession and control, including the right to appoint the master and crew. The term "bareboat charter-cum-demise" is defined as a bareboat charter where ownership is intended to be transferred after a specified period.

The 2025 Bill and the amended 1961 Act both reflect the inclusion of "inland vessel" (as per the Inland Vessels Act, 2021) alongside "ship," broadening the scope to cover inland waterway transport. This change, made explicit in the 2025 Bill and through the 2025 amendment to Section 115V, is significant in recognizing the growing importance of inland shipping.

There is no substantive difference in the definitions; both ensure that only arrangements granting full operational control to the charterer are covered, which is crucial for determining whether such charters fall within the tonnage tax regime.

b) "Director-General of Shipping"

Clause 235(c) and Section 115V(c) both reference the Director-General of Shipping appointed under the Merchant Shipping Act, 1958. The consistency here ensures a single point of regulatory reference for certification and compliance matters, minimizing ambiguity.

c) "Factory Ship" and "Fishing Vessel"

Both provisions define "factory ship" as a vessel providing processing services for fishing produce, and "fishing vessel" as per the Merchant Shipping Act, 1958. The alignment ensures that such vessels, which are not engaged in transportation but in processing or harvesting, are excluded from the tonnage tax regime, preventing potential misuse.

The reference to the definition in the Merchant Shipping Act ensures harmony between tax and maritime regulatory frameworks.

d) "Inland Vessel"

Clause 235(f) and Section 115V(ea) (inserted by the Finance Act, 2025, effective from 1-4-2026) both refer to the definition in the Inland Vessels Act, 2021. This is a significant update, as it explicitly brings inland waterway transport within the scope of the tonnage tax regime, reflecting the government's policy to promote inland shipping as a cost-effective and environmentally friendly mode of transport.

e) "Pleasure Craft"

Both definitions in Clause 235(g) and Section 115V(f) refer to ships or inland vessels used primarily for sport or recreation. The inclusion of "inland vessel" in the 2025 Bill and the amended 1961 Act ensures that such non-commercial vessels are excluded from the tonnage tax regime, maintaining the integrity of the scheme by limiting it to commercial shipping.

f) "Qualifying Company"

This is one of the most critical definitions. Clause 235(h) provides a detailed definition, requiring that a "qualifying company":

• is an Indian company;
• has its place of effective management (POEM) in India;
• owns at least one qualifying ship; and
• has as its main object the business of operating ships.

For POEM, it further clarifies that it is where the board or executive directors make decisions, or where executive directors/officers perform their functions if the board merely approves their decisions.

Section 115V(g) simply refers to "a company referred to in section 115VC," which in turn lays down similar conditions regarding Indian residency, ship ownership, and business object. However, Clause 235(h) directly incorporates the POEM criteria, aligning with international tax concepts and Indian tax law developments (notably, the introduction of POEM in the Income-tax Act for determining residency).

This explicit inclusion and elaboration of POEM in the 2025 Bill reflects a move towards greater clarity and alignment with global anti-avoidance standards, minimizing the risk of treaty shopping or artificial arrangements.

g) "Qualifying Ship"

Clause 235(i) provides a detailed, multi-part definition:

• Must be a seagoing ship/vessel or inland vessel of at least 15 net tonnage;
• Must be registered under the Merchant Shipping Act, 1958, or the Inland Vessels Act, 2021, or, if foreign, licensed by the Director-General of Shipping;
• Must have a valid certificate indicating net tonnage;
• Specifically excludes ships used primarily for land-based services, fishing vessels, factory ships, pleasure crafts, harbour and river ferries, offshore installations, and any qualifying ship used as a fishing vessel for more than 30 days in a tax year.

Section 115V(h) refers to "a ship or inland vessel... referred to in section 115VD," which lays down similar conditions, including tonnage, registration, and exclusions.

The 2025 Bill's definition is more self-contained and explicit, reducing the need to cross-reference other provisions and making compliance easier. The exclusion of ships used as fishing vessels for more than 30 days is a targeted anti-abuse measure, ensuring that only ships genuinely engaged in commercial transport benefit from the regime.

h) "Seagoing Ship"

Both Clause 235(j) and Section 115V(i) require certification by a competent authority, ensuring that only ships meeting international safety and operational standards are covered.

i) "Tonnage Income," "Tonnage Tax Activities," "Tonnage Tax Business," "Tonnage Tax Company," and "Tonnage Tax Scheme"

Clause 235(k)-(o) and Section 115V(j)-(m) provide definitions for these operational terms. The main difference is that the 2025 Bill refers to the relevant sections of the new Bill (e.g., section 228(3) and (7)), while the 1961 Act refers to the corresponding sections (e.g., 115V-I).

The definitions are substantively similar, ensuring continuity in the computation of tonnage income and the operation of the tonnage tax scheme. The use of updated cross-references in the 2025 Bill reflects the structural reorganization of the legislation.

4. Practical Implications

The updated definitions in Clause 235 have several practical implications:

• Wider Applicability: By explicitly including inland vessels, the scope of the tonnage tax regime is broadened, potentially benefiting a larger segment of the shipping industry, especially as the government seeks to promote inland water transport.
• Clarity in Eligibility: The detailed definition of "qualifying company" and "qualifying ship" reduces ambiguity, making it easier for companies to assess their eligibility and for tax authorities to enforce compliance.
• Alignment with International Standards: The explicit reference to POEM aligns the Indian regime with international anti-avoidance standards, reducing the risk of base erosion and profit shifting.
• Exclusion of Non-qualifying Activities: The specific exclusion of certain vessels and activities (e.g., fishing, pleasure crafts, offshore installations) ensures that the tax benefit is targeted at commercial shipping, preventing abuse of the regime.
• Administrative Efficiency: Self-contained and precise definitions reduce the need for cross-referencing, simplifying compliance and administration.

5. Comparative Analysis with Section 115V of the Income-tax Act, 1961

Section 115V, as amended, contains definitions that closely mirror those in Clause 235. However, there are subtle but important differences, as well as some clarifications and expansions in the 2025 Bill:

a. Structure and Scope

Section 115V provides definitions "unless the context otherwise requires" and refers to other sections (115VC for qualifying company, 115VD for qualifying ship, etc.) for further details. Clause 235, in contrast, consolidates the definitions in a single clause, with more detailed and self-contained provisions, especially regarding qualifying company and qualifying ship.

b. "Bareboat Charter" and Related Terms

The language in both provisions is substantially similar, with both now encompassing "ship or inland vessel" following amendments made by the Finance Act, 2025. This reflects a policy decision to expand the regime to inland waterway vessels, in line with the government's push for multimodal transport.

c. "Qualifying Company"

Section 115V(g) simply refers to a company as defined in section 115VC. Clause 235(h) incorporates the relevant criteria directly into the definition, providing more immediate clarity and reducing the need for cross-referencing.

Notably, Clause 235 expands on the "place of effective management" (POEM) test, providing specific guidance on how POEM is to be determined. This is a significant improvement, as it addresses potential ambiguities and aligns with international tax standards, especially OECD guidance on corporate residency.

d. "Qualifying Ship"

Section 115V(h) refers to "qualifying ship" as defined in section 115VD, whereas Clause 235(i) contains a detailed definition within the clause itself. The substantive criteria are similar, but Clause 235 provides a more explicit list of exclusions, including ships used as fishing vessels for more than thirty days in a tax year. This additional clarity helps prevent potential abuse and provides greater certainty to taxpayers and administrators.

The explicit inclusion of inland vessels and reference to the Inland Vessels Act, 2021, in both provisions (post-amendment) reflects the legislative response to the evolving nature of the shipping and logistics sector in India.

e. "Tonnage Tax Activities" and "Tonnage Tax Business"

Section 115V(k) refers to activities in section 115V-I(2) and (5), while Clause 235(l) refers to section 228(3) and (7) of the Bill. This difference in cross-referencing is structural, reflecting the reorganization of the relevant provisions in the new Bill. The substantive content appears to be aligned, focusing on the business of operating qualifying ships.

f. "Tonnage Tax Company" and "Tonnage Tax Scheme"

Both provisions define these terms similarly, referring to qualifying companies that have opted for the tonnage tax regime and the statutory scheme for computation of profits and gains.

g. Other Definitions

Definitions such as "factory ship", "fishing vessel", "pleasure craft", and "seagoing ship" are largely identical, with appropriate cross-references to the relevant maritime statutes.

h. Legislative Evolution and Policy Continuity

The amendments to Section 115V (effective from 1 April 2026) and the provisions of Clause 235 demonstrate a policy of continuity, with refinements to improve clarity, close loopholes, and expand the regime to inland waterway vessels. The explicit incorporation of POEM criteria and detailed exclusions reflect lessons learned from the operation of the regime since its inception in 2004.

6. Practical and Legal Implications

The refined definitions in Clause 235 are likely to have the following practical and legal impacts:

• Greater Certainty: Shipping companies will benefit from clearer eligibility criteria, reducing the risk of disputes and litigation.
• Compliance Burden: The requirement for documentation (e.g., net tonnage certificates, POEM evidence) may increase compliance costs, but this is balanced by the benefits of the regime.
• Regulatory Coordination: The reliance on certificates and registrations under the Merchant Shipping Act, 1958 and Inland Vessels Act, 2021 ensures that only lawfully registered and compliant vessels are eligible.
• Anti-Avoidance: The POEM test and explicit exclusions prevent misuse by companies seeking to access the regime without substantive shipping activity or Indian management.
• International Alignment: The provisions are broadly consistent with international tonnage tax regimes, enhancing India's competitiveness as a shipping hub.

7. Comparative Analysis with Other Jurisdictions

Tonnage tax regimes exist in several maritime nations, including the UK, the Netherlands, and Singapore. The key features of such regimes are:

• Taxation based on net tonnage rather than actual profits.
• Eligibility criteria focused on substantive shipping activity and management.
• Exclusion of non-shipping activities (e.g., fishing, recreation).

Clause 235 aligns with these international practices, with the additional feature of extending the regime to inland vessels, which is particularly relevant to India's geography and policy priorities.

8. Areas of Potential Ambiguity or Dispute

Despite the detailed definitions, certain areas may give rise to interpretative challenges:

• Place of Effective Management: While Clause 235(h) provides guidance, the determination of POEM can be fact-intensive and may result in disputes, especially for companies with international operations.
• Exclusion Criteria: The phrase "main purpose for which it is used is the provision of goods or services of a kind normally provided on land" could be subject to differing interpretations, potentially requiring judicial clarification.
• Duration of Use as Fishing Vessel: The exclusion of ships used as fishing vessels for more than thirty days in a tax year introduces a quantitative threshold that may be open to manipulation or dispute regarding the calculation of days.

Nevertheless, the overall drafting is robust and reflects an intention to minimize ambiguity.

9. Conclusion

Clause 235 of the Income Tax Bill, 2025 represents a thoughtful evolution of the legislative framework governing the tonnage tax regime for shipping companies in India. It consolidates and refines the definitions essential to the operation of the regime, aligns with international best practices, and addresses potential areas of abuse through detailed eligibility and exclusion criteria. The principal innovations include a more detailed POEM test, explicit inclusion of inland vessels, and comprehensive exclusions to prevent misuse.

The comparative analysis with Section 115V of the Income-tax Act, 1961 reveals substantial continuity in policy, with the 2025 Bill providing greater clarity and self-containment in its definitions. The changes are likely to enhance legal certainty, promote compliance, and support the growth of the Indian shipping sector in a globally competitive environment. Future developments may involve further judicial clarification of ambiguous terms and ongoing legislative refinement in response to industry feedback and global trends.

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Full Text:

Clause 235 Interpretation.

 

Dated: 9-5-2025