Simplified and concessionary method of taxation based on the net tonnage of qualifying ships, rather than on actual profits : Clause 228(1)-(13) of the Income Tax Bill, 2025 Vs. Section 115VI of the Income-tax Act, 1961

Clause 228 Relevant shipping income and exclusion from book profit.

Income Tax Bill, 2025

Introduction

The Indian tonnage tax regime, introduced in 2004, marked a significant shift in the taxation of shipping companies, aligning the Indian framework with international best practices. The regime is designed to enhance the competitiveness of Indian shipping companies by providing a predictable, simplified, and concessionary method of taxation based on the net tonnage of qualifying ships, rather than on actual profits. The Income Tax Bill, 2025, through Clause 228, seeks to further refine and update the statutory provisions governing the computation of relevant shipping income and its exclusion from book profits. This clause is intended to replace and update the corresponding provisions u/s 115VI of the Income-tax Act, 1961. Both Clause 228 and Section 115VI set out the core and incidental activities that constitute relevant shipping income, the treatment of income from non-qualifying ships, the handling of related party transactions, and the procedural mechanisms for government notifications and parliamentary oversight. The new Bill, however, introduces certain clarifications and structural changes that warrant detailed analysis.

Objective and Purpose

The legislative intent behind both Clause 228 and Section 115VI is to ensure that shipping companies opting for the tonnage tax regime are taxed in a manner that reflects the unique nature of the shipping business, characterized by high capital intensity, cyclical earnings, and global competition. The purpose is to:

• Define what constitutes "relevant shipping income" for tonnage tax companies;
• Prescribe the method for computing such income and its exclusion from general book profits;
• Ensure that only income genuinely attributable to qualifying shipping activities is taxed under the beneficial tonnage tax regime, while other income is taxed under normal provisions;
• Prevent tax avoidance through related party transactions or artificial arrangements;
• Provide clarity and certainty to taxpayers and tax administrators alike.

The historical background to these provisions lies in the need to make Indian shipping more globally competitive, stem the outflow of Indian tonnage to flags of convenience, and attract investment in the sector by reducing tax compliance burdens.

Detailed Analysis of Clause 228(1)-(13) and Comparison with Section 115VI

1. Definition of Relevant Shipping Income: Sub-sections (1), (2), (7)

Clause 228(1): Defines "relevant shipping income" as the sum of profits from core activities (sub-section (3)) and prescribed incidental activities (sub-section (7)).
Section 115VI(1): Similarly defines "relevant shipping income" as profits from core activities (sub-section (2)) and prescribed incidental activities (sub-section (5)).

Comparison & Analysis:

• Both provisions mirror each other in structure and substance, with minor drafting differences. The Bill uses "as prescribed for the purpose" for incidental activities (sub-section (7)), while the Act uses "which may be prescribed for the purpose" (sub-section (5)).
• Both include a limitation: if income from incidental activities exceeds 0.25% of core activity turnover, the excess is taxable under general provisions, not under the tonnage tax regime. This ensures that the regime is not misused for non-core income streams.
• The threshold and mechanism for exclusion are identical, preserving the integrity of the tonnage tax regime.

2. Core Activities: Sub-sections (3), (4)

Clause 228(3): Elaborates on core activities, including operating qualifying ships and specified ship-related/inland vessel-related activities. It further details "shipping contracts" (pooling arrangements, contracts of affreightment) and "specific shipping trades" (on-board/on-shore activities, slot/space/joint charters, feeder services, container box leasing).

Section 115VI(2): Contains an almost identical breakdown, with the same explanations for pooling arrangements and contracts of affreightment.

Comparison & Analysis:

• The Bill and Act are substantively aligned, with the Bill providing slightly more modernized language ("as the case may be") to reflect inclusion of inland vessels, consistent with recent legislative amendments.
• Both clarify that only income from specified activities is eligible, preventing scope creep.
• The detailed explanations ensure that common industry practices (like pooling, slot charters) are within the regime, providing much-needed certainty.

3. Power to Exclude Activities or Prescribe Limits: Sub-section (5) in Bill, Sub-section (3) in Act

Clause 228(5): Empowers the Central Government to exclude any activity from the scope of core activities or prescribe limits via notification.

Section 115VI(3): Contains an identical provision.

Comparison & Analysis:

• Both provisions give the government flexibility to adapt the regime to changing industry practices or to curb abuse.
• The notification mechanism ensures transparency and parliamentary oversight.

4. Parliamentary Oversight of Notifications: Sub-section (6) in Bill, Sub-section (4) in Act

Clause 228(6): Requires every notification to be laid before Parliament, subject to modification or annulment.

Section 115VI(4): Provides the same mechanism.

Comparison & Analysis:

• Both provisions reinforce legislative control over delegated legislation, ensuring accountability.
• The process for laying notifications and the effect of parliamentary modification/annulment are identical.

5. Incidental Activities: Sub-section (7) in Bill, Sub-section (5) in Act

Clause 228(7): Defines incidental activities as those incidental to core activities and as prescribed.

Section 115VI(5): Uses similar language.

Comparison & Analysis:

• Both leave the precise scope to be defined by prescription (i.e., delegated legislation), allowing for flexibility.
• This is essential as shipping practices evolve and new ancillary services emerge.

6. Non-Qualifying Ships: Sub-section (8) in Bill, Sub-section (6) in Act

Clause 228(8): States that income from non-qualifying ships is to be computed under general provisions, not under the tonnage tax regime.

Section 115VI(6): Contains an identical rule.

Comparison & Analysis:

• This ensures the regime is limited to qualifying ships, preventing abuse by including income from non-eligible vessels.
• It upholds the integrity of the tonnage tax regime and prevents tax arbitrage.

7. Inter-Business Transfers at Non-Market Value: Sub-sections (9), (10), (11) in Bill; Sub-section (7) in Act

Clause 228(9): Requires that transfers of goods/services between tonnage tax business and other businesses be valued at market value for computation purposes.
Clause 228(10): Defines "market value."
Clause 228(11): Allows the Assessing Officer to use a reasonable basis if computation at market value presents exceptional difficulties.

Section 115VI(7): Contains all these provisions in a single sub-section, including the definition of market value and the Assessing Officer's power.

Comparison & Analysis:

• The Bill splits these into three sub-sections for clarity, but the substance remains unchanged.
• This anti-avoidance measure prevents manipulation of profits by undervaluing or overvaluing inter-business transfers.
• The Assessing Officer's discretion is a crucial safeguard against complex or opaque transactions.

8. Transfer Pricing/Deemed Profits: Sub-section (12) in Bill, Sub-section (8) in Act

Clause 228(12): Empowers the Assessing Officer to adjust income if business with related parties produces more than ordinary profits, to ensure only reasonable income is taxed under the regime.

Section 115VI(8): Contains an identical provision.

Comparison & Analysis:

• This is an anti-abuse provision, mirroring transfer pricing principles, to prevent profit shifting or income inflation through related party transactions.
• The wording "more than the ordinary profits which might be expected" is consistent with international norms.

9. Losses in Tonnage Tax Business: Sub-section (13) in Bill, Explanation in Act

Clause 228(13): States that if relevant shipping income is a loss, such loss is ignored for computing tonnage income.

Section 115VI Explanation (after sub-section (8)): Contains the same rule.

Comparison & Analysis: - This is a key feature of the tonnage tax regime: it is a presumptive tax, so actual losses are not recognized for tax purposes. This simplifies compliance and administration but can be a disadvantage in years of genuine loss.

Practical Implications

For Shipping Companies:

• The provisions provide a stable, predictable tax environment, facilitating long-term planning and investment.
• Companies must maintain detailed and accurate records to segregate core and incidental activities, and to document transfer pricing between business segments.
• The anti-avoidance provisions require robust compliance systems to withstand scrutiny by tax authorities.

For Tax Authorities:

• The framework provides clear criteria for assessing eligibility for tonnage tax and for detecting and addressing abuses.
• The discretionary powers (e.g., in exceptional cases or related party arrangements) require careful documentation and justification to withstand appellate review.

For Policymakers:

• The regime balances the need to support the shipping industry with safeguards against revenue loss through abuse.
• The delegated powers and parliamentary oversight mechanisms ensure ongoing adaptability and accountability.

Comparative Analysis: Clause 228 vs. Section 115VI

Continuities:

• The overall structure, definitions, and mechanisms are fundamentally unchanged, preserving legal continuity and minimizing disruption to the industry.
• Key thresholds (e.g., 0.25% cap on incidental income), anti-avoidance provisions, and procedural safeguards are retained.
• The expanded reference to "inland vessel-related activities" in both provisions reflects recent legislative amendments, aligning the regime with current industry practice.

Changes and Clarifications:

• Clause 228(3) and related provisions incorporate the latest amendments regarding "inland vessel-related activities," ensuring that the scope of tonnage tax keeps pace with the multimodal logistics sector.
• The Bill's language is modernized and streamlined for clarity, though the substantive rules remain the same.
• Subsequent sub-sections (14)-(16) in Clause 228 (not analyzed in detail here) provide new or clarified rules on allocation of common costs, depreciation, and exclusion from book profits, reflecting practical experience since the original regime's introduction.

Potential Issues and Ambiguities:

• The reliance on notifications and prescribed rules for defining incidental activities and for excluding activities from core activities requires timely and transparent rule-making.
• The anti-avoidance provisions rely on the subjective judgment of the Assessing Officer, which may lead to disputes and litigation if not exercised judiciously.
• The exclusion of losses may be controversial in periods of industry downturn, though it is consistent with international tonnage tax regimes.

Ambiguities and Potential Issues

While the provisions are comprehensive, certain areas may give rise to interpretational challenges:

• The definition of "incidental activities" is left to prescription, which could lead to disputes if the rules are not sufficiently detailed.
• The determination of "market value" for inter-business transfers can be contentious, especially for unique or specialized assets/services.
• The threshold for incidental income (0.25%) may require periodic review to reflect industry realities.
• The application of the "more than ordinary profits" test in related party transactions may require further guidance to ensure uniformity.

Conclusion

Clause 228 of the Income Tax Bill, 2025, represents a careful evolution of the tonnage tax regime, largely retaining the core framework of Section 115VI of the Income-tax Act, 1961, while introducing greater clarity, modernized language, and explicit procedural safeguards. The regime continues to balance the need for a competitive and attractive tax environment for Indian shipping with robust anti-abuse mechanisms. The Bill's approach to defining, computing, and policing relevant shipping income is consistent with international best practices and is likely to provide continued certainty and stability to the sector.

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Full Text:

Clause 228 Relevant shipping income and exclusion from book profit.

 

Dated: 14-5-2025