Exclusion of Deductions and Loss Set-Off under the Tonnage Tax Regime : Clause 230(1) of the Income Tax Bill, 2025 Vs. Section 115VL of the Income-tax Act, 1961

Clause 230 Exclusion of deduction, loss, set off etc.,

Income Tax Bill, 2025

Introduction

Clause 230(1) of the Income Tax Bill, 2025 introduces special provisions for the computation of income of shipping companies that opt for taxation under the tonnage tax regime. This clause is a pivotal component of the proposed legislation, intending to streamline and clarify the tax treatment of shipping companies in India. It essentially mirrors, with certain modifications, the existing framework u/s 115VL of the Income-tax Act, 1961. Both provisions are designed to ensure that the tonnage tax regime operates as a self-contained code, distinct from the general provisions for computation of business income under the Act. The tonnage tax regime represents a shift from the traditional system of taxing shipping companies on their actual profits, instead taxing them on the notional income computed with reference to the net tonnage of qualifying ships operated. This specialized regime aims to provide certainty, simplicity, and international competitiveness to Indian shipping companies. This commentary provides a structured and detailed analysis of Clause 230(1), examining its objectives, operative provisions, practical implications, and its relationship with the existing Section 115VL. The analysis also highlights the nuances, similarities, and potential implications for stakeholders.

Objective and Purpose

The legislative intent behind Clause 230(1) and its predecessor, Section 115VL, is to create a clear, predictable, and administratively efficient framework for the taxation of shipping companies under the tonnage tax scheme. The policy rationale draws from international best practices, recognizing that shipping is a highly mobile and globally competitive industry. The tonnage tax regime is intended to:

• Provide fiscal certainty and reduce compliance complexity for shipping companies.
• Align Indian tax law with global standards, thereby attracting shipping business to the Indian flag and registry.
• Prevent double benefit or unintended tax arbitrage by excluding the application of general provisions for loss set-off, deductions, and allowances once a company opts into the tonnage tax scheme.
• Ensure the regime is self-contained, with clear rules on what is and is not permissible in terms of deductions and loss adjustments.

Historically, the tonnage tax regime was introduced in India in the early 2000s, inspired by similar regimes in the UK, the Netherlands, and other maritime nations. The rationale was to arrest the decline in the Indian shipping fleet and to provide a competitive tax environment.

Detailed Analysis of Clause 230(1) and Section 115VL

Clause 230(1) is structured into four principal sub-clauses (a) to (d), each corresponding closely to the four sub-clauses of Section 115VL. A detailed breakdown and analysis of each provision follows, with a comparative lens.

1. Application of Loss, Allowance, or Deduction Provisions [Clause 230(1)(a) vs. Section 115VL(i)]

Textual Comparison:

• Clause 230(1)(a): Applies sections 28 to 52 as if every loss, allowance, or deduction referred to therein and relating to or allowable for any of the relevant tax years had been given full effect to for that tax year itself.
• Section 115VL(i): Applies sections 30 to 43B as if every loss, allowance, or deduction referred to therein and relating to or allowable for any of the relevant previous years had been given full effect to for that previous year itself.

Analysis: The core principle here is that, for companies under the tonnage tax regime, all losses, allowances, and deductions that would otherwise be available under the specified sections are deemed to have been fully utilized in the year they arise. This fiction is crucial for two reasons:

1. It prevents the carry forward or set-off of losses, allowances, or deductions to subsequent years, thereby avoiding any overlap or double benefit once the company is under the tonnage tax scheme.
2. It simplifies compliance and computation, as companies and tax authorities need not track unabsorbed depreciation or losses from prior years for the purposes of the tonnage tax business.

The difference in the range of sections referenced is notable:

• Clause 230(1)(a): Refers to sections 28 to 52, a broader range encompassing the entire computation of business income, including profits and gains of business or profession, depreciation, and other deductions.
• Section 115VL(i): Refers to sections 30 to 43B, which are more narrowly focused on deductions and allowances specifically available to businesses.

The expansion in the Bill to sections 28-52 may be intended to further clarify or broaden the scope of the deeming fiction, ensuring that all relevant losses and deductions are covered. However, this may also bring in additional provisions not previously covered, potentially affecting the computation base.

2. Prohibition on Carry Forward or Set-Off of Losses [Clause 230(1)(b) vs. Section 115VL(ii)]

Textual Comparison:

• Clause 230(1)(b): Prohibits the carry forward or set-off of losses referred to in sections 108(1) or (2)(a), 109, 112(1), or 116(1), in so far as such loss relates to the business of operating qualifying ships, for any tax years when the company is under the tonnage tax scheme.
• Section 115VL(ii): Prohibits the carry forward or set-off of losses referred to in sub-sections (1) and (3) of section 70, sub-sections (1) and (2) of section 71, section 72(1), and section 72A(1), in so far as such loss relates to the business of operating qualifying ships for any previous years under the scheme.

Analysis: Both provisions seek to ring-fence the tonnage tax regime by ensuring that losses from the business of operating qualifying ships are not carried forward or set off in subsequent years once the company is under the tonnage tax scheme. The rationale is to prevent companies from leveraging losses accrued under the ordinary regime against notional income under the tonnage tax regime, which would otherwise defeat the purpose of the simplified and concessional regime. The reference to different sections reflects the reorganization and renumbering of provisions in the new Bill as compared to the 1961 Act. The sections referred to in Section 115VL (sections 70, 71, 72, 72A) deal with intra-head and inter-head set-off and carry forward of losses, while the new Bill references (sections 108, 109, 112, 116) are likely the corresponding provisions in the reorganized Bill. The principle, however, remains unchanged: no set-off or carry forward of losses relating to the tonnage tax business is permitted once the company is under the scheme.

3. Disallowance of Deductions under Chapter VIII/Chapter VI-A [Clause 230(1)(c) vs. Section 115VL(iii)]

Textual Comparison:

• Clause 230(1)(c): Prohibits the allowance of any deduction under Chapter VIII in relation to the profits and gains from the business of operating qualifying ships.
• Section 115VL(iii): Prohibits the allowance of any deduction under Chapter VI-A in relation to the profits and gains from the business of operating qualifying ships.

Analysis: This provision excludes the applicability of deductions under Chapter VI-A (1961 Act) or Chapter VIII (2025 Bill) to the profits derived from the tonnage tax business. These chapters typically contain deductions for various investments, donations, and other specified expenditures (e.g., sections 80C to 80U in the 1961 Act). By excluding these deductions, the legislation ensures that the tonnage tax regime remains a notional, concessional basis of taxation, and is not further reduced by general deductions available to other businesses. The change in chapter reference is a result of the reorganization of the statute and does not alter the substantive effect of the provision.

4. Computation of Depreciation Allowance [Clause 230(1)(d) vs. Section 115VL(iv)]

Textual Comparison:

• Clause 230(1)(d): States that in computing the depreciation allowance u/s 33, the written down value (WDV) of any asset used for the purposes 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 tax years.
• Section 115VL(iv): Provides that in computing the depreciation allowance u/s 32, the WDV of any asset used for the purposes 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.

Analysis: This provision addresses the technical issue of depreciation accounting. Even though depreciation is not directly deducted in the computation of tonnage income, the WDV of assets for future computation (e.g., if the company exits the tonnage tax scheme) must be adjusted as if depreciation had been claimed and allowed for each year under the scheme. This prevents an artificial inflation of depreciation claims upon exit from the scheme and maintains consistency in asset valuation for tax purposes. The reference to section 33 (in the Bill) versus section 32 (in the Act) is an organizational change, reflecting the renumbering of the relevant depreciation provision.

Practical Implications

The practical effects of Clause 230(1) (and its predecessor) are significant for shipping companies, tax authorities, and advisors:

• For shipping companies: The regime offers simplicity and predictability, as the computation of taxable income is delinked from actual profits and losses. However, companies must carefully consider the loss of ability to carry forward or set off losses and the ineligibility for deductions under other chapters.
• For tax administration: The self-contained nature of the tonnage tax regime reduces disputes and compliance costs, as the scope for litigation over deductions, allowances, and set-offs is minimized.
• For advisors and auditors: There is a need to ensure proper tracking of asset values and pre-option losses, and to advise clients on the optimal timing and implications of opting into the regime.
• On transitional issues: The new sub-sections (2)-(4) in Clause 230 provide clarity on how to treat pre-option losses, reducing the risk of interpretative disputes.

Comparative Analysis: Clause 230(1) vs. Section 115VL

Substantive Similarities:

• Both provisions establish a self-contained code for the computation of tonnage income, excluding the general rules for deductions, allowances, and loss set-off.
• The core principles-deeming full effect to all losses and deductions in the year they arise, prohibiting carry forward/set-off, and disallowing deductions under other chapters-are preserved.
• Both address the technical issue of depreciation, ensuring that asset values are appropriately adjusted for tax purposes on exit from the regime.

Key Differences and Developments:

• Scope of Sections Referenced: The Bill references a broader range of sections (28-52) as compared to the Act (30-43B), potentially expanding the scope of the deeming fiction.
• Transitional Provisions: The Bill introduces specific rules for the treatment of pre-option losses, providing greater clarity on their set-off and apportionment, which was less explicit in the 1961 Act.
• Organizational Changes: The renumbering and reorganization of sections and chapters in the Bill reflect a modernization and rationalization of the statute, though the substantive content remains largely similar.

Potential Issues and Ambiguities:

• The broader reference to sections 28-52 may create interpretative questions about which losses and deductions are deemed to be given effect, particularly for items not previously covered u/ss 30-43B.
• The apportionment mechanism in sub-section (4) of Clause 230 may require further guidance or rules to ensure consistency and fairness in practice.
• Companies with complex group structures or diversified operations may face challenges in segregating shipping business losses and assets for the purposes of these provisions.

Practical Implications for Stakeholders

The exclusionary approach adopted by both Clause 230(1) and Section 115VL has several practical implications:

• Strategic Tax Planning: Companies must weigh the benefits of the tonnage tax regime against the loss of flexibility in loss set-off and deductions. Entry into the regime is generally irreversible for a minimum period, and the inability to utilize losses or deductions may affect overall tax efficiency.
• Accounting and Compliance: Shipping companies must maintain clear records to track asset values, especially for depreciation purposes, and to document losses and deductions prior to opting for the tonnage tax scheme.
• Regulatory Certainty: The provisions provide a high degree of certainty and reduce the scope for interpretative disputes, benefiting both taxpayers and the tax administration.
• International Competitiveness: The regime aligns with international norms, enhancing the attractiveness of the Indian shipping registry.

Conclusion

Clause 230(1) of the Income Tax Bill, 2025, represents a continuation and refinement of the established approach u/s 115VL of the Income-tax Act, 1961, governing the computation of income for shipping companies under the tonnage tax regime. The provisions collectively serve to create a self-contained, exclusionary code, ensuring that the regime operates as intended-on a notional, concessional basis, free from the complexities and opportunities for tax planning associated with the general provisions for deductions and loss set-off. The key developments in the Bill, particularly the broader reference to relevant sections and the explicit transitional provisions for pre-option losses, reflect a maturing and clarifying of the law in this area. While the core principles remain unchanged, these refinements are likely to provide greater clarity and certainty to stakeholders. Going forward, further guidance may be required on the practical mechanics of apportionment and the treatment of complex group structures. However, the overall direction of the law is clear: the tonnage tax regime is to be a simplified, competitive, and administratively efficient framework for the taxation of Indian shipping companies.

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Full Text:

Clause 230 Exclusion of deduction, loss, set off etc.,

 

Dated: 14-5-2025