Computation of Taxable income of the shipping companies based on Tonnage: Clause 227(1)-(6) of the Income Tax Bill, 2025 Vs. Section 115VG of the Income-tax Act, 1961

Clause 227 Computation of tonnage income.

Income Tax Bill, 2025

Introduction

The Indian maritime sector plays a critical role in the nation's trade, with shipping companies forming the backbone of international and coastal commerce. Recognizing the unique nature of shipping operations and the challenges in determining actual profits, India has, like many maritime nations, adopted a tonnage tax regime. This regime allows shipping companies to compute their taxable income based on the net tonnage of their fleet rather than traditional profit-based taxation. The legislative framework for this regime is presently found in Chapter XII-G of the Income-tax Act, 1961, specifically in section 115VG. The Income Tax Bill, 2025, proposes to update and consolidate these provisions through Clause 227.

This commentary provides a detailed analysis of Clause 227(1)-(6) of the Income Tax Bill, 2025, examining each sub-clause in depth, interpreting its practical and legal implications, and comparing it with the corresponding provisions in section 115VG of the Income-tax Act, 1961. The analysis aims to highlight continuities, departures, and potential legal or operational consequences, while also considering the broader policy rationale and industry impact.

Objective and Purpose

The tonnage tax regime was introduced to simplify the taxation of shipping companies, reduce disputes, and enhance the competitiveness of Indian shipping businesses. The core objective is to provide certainty and ease of compliance by linking taxable income to the tonnage capacity of qualifying ships, rather than the complex and often volatile profits of shipping operations. This system aligns Indian law with international best practices, facilitating global trade and investment in the shipping sector.

Clause 227 of the Income Tax Bill, 2025, seeks to refine and modernize the computation of tonnage income, taking into account developments in maritime operations and aligning with the evolving legal and policy landscape. The provision aims to ensure clarity, fairness, and administrative efficiency, while maintaining the essential features of the tonnage tax system.

Detailed Analysis of Clause 227(1)-(6) of the Income Tax Bill, 2025

Clause 227(1): Aggregation of Tonnage Income

Text: "The tonnage income of a tonnage tax company for a tax year shall be the aggregate of the tonnage income of each qualifying ship computed as per sub-sections (2) and (3)."

Interpretation and Implications: This sub-clause establishes the foundational principle that the tonnage income of a company is calculated by aggregating the tonnage income of each qualifying ship in its fleet. The provision makes it explicit that the computation is ship-specific, reflecting the operational reality where companies may own, charter, or operate multiple vessels under varying arrangements and durations. The reference to computation "as per sub-sections (2) and (3)" ensures that the subsequent detailed methodology is strictly followed, reinforcing uniformity and predictability.

Comparison with Section 115VG(1): The language and structure of Clause 227(1) closely mirror section 115VG(1) of the Income-tax Act, 1961, which also mandates aggregation of tonnage income for each qualifying ship. Both provisions emphasize the ship-wise computation and subsequent aggregation, underscoring legislative continuity in the approach to determining taxable income under the tonnage tax regime.

Clause 227(2): Formula for Tonnage Income Calculation

Text: "For the purposes of sub-section (1), the tonnage income of each qualifying ship shall be computed as per the following formula: TI = DTI x N where, TI = the tonnage income of each qualifying ship; DTI = the daily tonnage income of each qualifying ship; N = the number of days, in the tax year, or in part of the tax year in case the ship is operated by the company as a qualifying ship for only part of the tax year."

Interpretation and Implications: This sub-clause provides a clear and arithmetical method for computing tonnage income. The daily tonnage income (DTI) acts as a standardized proxy for daily profit, and multiplication by the number of qualifying days (N) accommodates vessels that may only be operated for part of the year. This approach offers flexibility and accuracy, ensuring that companies are taxed only for the period during which a ship qualifies under the regime. It addresses scenarios such as acquisition, sale, or temporary operational status changes of ships during the tax year.

Comparison with Section 115VG(2): Section 115VG(2) adopts an almost identical methodology, specifying that tonnage income is the daily tonnage income multiplied by the number of days in the previous year (or the relevant part thereof). The only substantive difference lies in the terminology: the 1961 Act refers to "previous year," while the 2025 Bill uses "tax year," reflecting an anticipated harmonization of terminology across tax statutes. Substantively, both provisions ensure proportionality and fairness in the computation of tonnage income.

Clause 227(3): Determination of Daily Tonnage Income

Text: "For the purposes of sub-section (2), the daily tonnage income of a qualifying ship having tonnage referred to in column A of the Table below shall be the amount specified in the corresponding entry in column B thereof."

Table Analysis:

• Sl. No.	Qualifying ship having net tonnage	Amount of daily tonnage income
  1	Up to 1,000	Rs. 70 for each 100 tons
  2	Exceeding 1,000 but not more than 10,000	Rs. 700 plus Rs. 53 for each 100 tons exceeding 1,000 tons
  3	Exceeding 10,000 but not more than 25,000	Rs. 5,470 plus Rs. 42 for each 100 tons exceeding 10,000 tons
  4	Exceeding 25,000	Rs. 11,770 plus Rs. 29 for each 100 tons exceeding 25,000 tons

Interpretation and Implications: The daily tonnage income rates are tiered, with marginal rates decreasing as the size of the ship increases. This reflects the principle of economies of scale, recognizing that larger vessels may have lower per-ton earning capacity. The structure incentivizes the operation of larger, more efficient ships, aligning with global shipping trends. The use of precise slabs and formulae ensures objectivity and reduces interpretative disputes.

Comparison with Section 115VG(3): The slab rates and calculation methodology in Clause 227(3) are identical to those in section 115VG(3) (as amended by the Finance Act, 2012). Both provisions set out the same four-tiered structure and rates, indicating that the 2025 Bill does not propose any material change in the quantum or structure of daily tonnage income. This continuity is critical for industry stability and investor confidence.

Clause 227(4): Definition and Certification of Tonnage

Text: "In this Part, the tonnage shall- (a) mean the tonnage of a ship or inland vessel, as the case may be, indicated in the certificate referred to in sub-section (9); and (b) include the deemed tonnage, being the tonnage in respect of an arrangement of purchase of slots, slot charter and an arrangement of sharing of break-bulk vessel, computed in the manner, as prescribed."

Interpretation and Implications: This sub-clause clarifies that "tonnage" encompasses both physical and deemed tonnage. The physical tonnage must be certified by the competent authority, ensuring regulatory oversight and standardization. The inclusion of "deemed tonnage" addresses modern shipping practices such as slot charters and break-bulk vessel sharing, where companies may not own or charter entire ships but operate on a space-sharing basis. The requirement for computation "as prescribed" delegates the specifics to subordinate legislation, allowing adaptability to changing industry practices.

Comparison with Section 115VG(4): Section 115VG(4) is substantively similar, defining tonnage as per the certificate u/s 115VX and including deemed tonnage for specified arrangements. The main difference is that Clause 227(4) directly references sub-section (9) for certification details, while section 115VG(4) references section 115VX. The 2025 Bill thus consolidates the certification and computation provisions within the same section, potentially enhancing clarity and ease of reference.

Clause 227(5): Rounding Off Tonnage

Text: "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 and if the tonnage so rounded off, as per clause (a), is not a multiple of hundred, then, if the last figure in that amount is- (a) fifty tons or more, the tonnage shall be increased to the next higher tonnage; (b) less than fifty tons, the tonnage shall be reduced to the next lower tonnage, which is a multiple of hundred and the tonnage so rounded off shall be the tonnage of the ship for the purposes of this section."

Interpretation and Implications: This sub-clause prescribes a standardized method for rounding off tonnage to the nearest hundred tons, with precise rules for upward or downward adjustment based on the last two digits. Ignoring kilograms ensures that only whole tons are considered, reducing administrative complexity. This approach eliminates minor discrepancies and ensures uniformity in the computation of tonnage income, which is critical for both taxpayers and tax authorities.

Comparison with Section 115VG(5): The rounding methodology in Clause 227(5) is identical to that in section 115VG(5). Both provisions seek to avoid disputes over marginal tonnage differences and facilitate straightforward calculation. The only minor difference is stylistic, with the 2025 Bill using more modern legislative drafting conventions.

Clause 227(6): Bar on Deductions and Set Offs

Text: "No deduction or set off shall be allowed in computing the tonnage income under this Part, irrespective of anything contained in any other provision of this Act."

Interpretation and Implications: This is a non obstante clause that overrides all other provisions of the Act, prohibiting any deductions, allowances, or set offs (such as business expenses, depreciation, or loss carryforwards) from the computed tonnage income. The rationale is that the tonnage tax regime is a presumptive system, with the deemed income representing the final taxable amount. This ensures administrative simplicity and prevents manipulation or litigation over allowable expenses.

Comparison with Section 115VG(6): Section 115VG(6) contains an almost identical non obstante clause. Both provisions reinforce the exclusivity and integrity of the tonnage tax computation, precluding the application of general income tax deductions or set offs.

Practical Implications

• For Shipping Companies: The provisions provide a predictable and simplified tax base, reducing compliance costs and litigation risks. The aggregation and slab-based computation allow companies to plan their fleet composition and operations with greater certainty.
• For Tax Authorities: The clear and formulaic approach facilitates efficient assessment and reduces the scope for disputes or subjective interpretations.
• For the Maritime Sector: The regime enhances the competitiveness of Indian shipping companies vis-`a-vis their global counterparts, many of whom operate under similar tonnage tax systems.
• For Policy Makers: The continued adoption of the tonnage tax regime signals a commitment to supporting the shipping industry, while the inclusion of modern operational practices (such as slot charters) ensures regulatory relevance.

Comparative Analysis and Observations

A close comparison of Clause 227(1)-(6) of the Income Tax Bill, 2025 with section 115VG of the Income-tax Act, 1961 reveals that the two sets of provisions are, in substance and structure, virtually identical. The following points of comparison are noteworthy:

• Continuity of Policy: The 2025 Bill maintains the core features of the tonnage tax regime, including ship-wise aggregation, daily tonnage income slabs, certification requirements, rounding rules, and the bar on deductions.
• Modernization and Clarification: The 2025 Bill consolidates references (e.g., certification requirements) and updates terminology (e.g., "tax year" vs. "previous year"), reflecting efforts to modernize and harmonize tax legislation.
• Inclusion of Contemporary Shipping Practices: Both provisions explicitly include "deemed tonnage" for slot charters and similar arrangements, demonstrating responsiveness to industry evolution.
• Administrative Efficiency: The formulaic and non-discretionary nature of the computation minimizes compliance burdens and potential for disputes.
• Potential for Future Reform: While the provisions are robust and widely accepted, the reliance on prescribed rules for deemed tonnage computation and certification leaves room for future regulatory updates as shipping practices evolve.

Ambiguities and Potential Issues

• Deemed Tonnage Computation: The actual method for calculating deemed tonnage is left to subordinate legislation ("as prescribed"), which may create uncertainty if rules are not promptly or clearly notified.
• Certification Disputes: The reliance on certificates from authorities (Indian or foreign) could lead to disputes over recognition, especially for ships registered abroad or inland vessels.
• Exclusivity of the Regime: The absolute bar on deductions and set offs ensures simplicity but may disadvantage companies facing extraordinary or one-off losses unrelated to operational efficiency.
• Currency of Slab Rates: The slab rates have remained unchanged since the 2012 amendment. There may be a case for periodic review to reflect inflation, changes in shipping economics, or international competitiveness.

Conclusion

Clause 227(1)-(6) of the Income Tax Bill, 2025 represents a faithful continuation and modest modernization of the tonnage tax regime as articulated in section 115VG of the Income-tax Act, 1961. The provisions are characterized by clarity, administrative simplicity, and alignment with international maritime taxation standards. By explicitly providing for contemporary shipping arrangements and maintaining a predictable computation methodology, the regime continues to serve the policy objectives of supporting the Indian shipping industry and facilitating global trade.

While the regime's core features remain robust, attention should be paid to the timely updating of prescribed rules and periodic review of slab rates to ensure ongoing relevance and fairness. The consolidation and clarification of certification requirements in the 2025 Bill may further streamline compliance and reduce interpretative disputes. Overall, the tonnage tax provisions exemplify a pragmatic approach to sector-specific taxation, balancing the interests of industry, government, and the broader economy.

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Full Text:

Clause 227 Computation of tonnage income.

 

Dated: 10-5-2025