Capital Gains taxation on Qualifying Ships : Clause 229(8) to (10) of the Income Tax Bill, 2025 Vs. Section 115VN of the Income-tax Act, 1961

Clause 229 Depreciation and gains relating to tonnage tax assets.

Income Tax Bill, 2025

Introduction

The Indian legislative framework for the taxation of shipping companies has, over the years, recognized the unique nature of the shipping industry and the need for a specialized regime. The tonnage tax scheme (TTS) was introduced as a concessional regime for shipping companies, providing for the computation of income based on the net tonnage of qualifying ships rather than the traditional income computation under normal provisions. The Income Tax Bill, 2025, continues this legacy by proposing a comprehensive regime under Clause 229 for the treatment of depreciation and capital gains relating to tonnage tax assets. Clause 229(8) to (10) of the Income Tax Bill, 2025, specifically addresses the taxation of profits or gains arising from the transfer of capital assets, i.e., qualifying ships or vessels, and delineates the treatment of such gains under the tonnage tax regime. These provisions are a direct evolution of Section 115VN of the Income-tax Act, 1961, which currently governs the chargeability and computation of gains from the transfer of tonnage tax assets. This commentary provides a detailed, itemized analysis of Clause 229(8) to (10), drawing comparisons with the existing Section 115VN, and discusses the legal, practical, and policy implications for stakeholders within the shipping industry.

Objective and Purpose

The primary objective of Clause 229(8)-(10) and Section 115VN is to ensure clarity and consistency in the computation and taxation of capital gains arising from the transfer of assets forming part of the block of qualifying assets under the tonnage tax regime. The legislative intent is to:

• Prevent tax arbitrage or avoidance by ensuring that gains from the sale of qualifying ships are appropriately taxed, even within a concessional regime.
• Maintain a clear demarcation between qualifying and non-qualifying assets for depreciation and capital gains purposes.
• Provide certainty to shipping companies regarding the tax treatment of asset transfers during or after the tonnage tax period.
• Align the computation methodology with general capital gains provisions, while making necessary modifications to reflect the peculiarities of the tonnage tax scheme.

The historical background for these provisions lies in the need to adapt standard depreciation and capital gains rules (which are based on the concept of block of assets) to the specialized context of tonnage tax, where only certain ships qualify for concessional treatment and others do not.

Detailed Analysis of Clause 229(8) to (10) of the Income Tax Bill, 2025

Clause 229(8): Taxation of Gains from Transfer of Qualifying Assets

Any profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax as per sections 67 and 74, and the capital gains so arising shall be computed as per sections 67 to 81.

Clause 229(8) establishes the foundational rule that any profits or gains resulting from the transfer (i.e., sale, exchange, or relinquishment) of a capital asset, specifically an asset forming part of the block of qualifying assets, are chargeable to income-tax. The computation and chargeability are to be done in accordance with sections 67 and 74 (and for computation, sections 67 to 81).

Interpretation and Legal Principle:

- The clause ensures that even though the tonnage tax regime provides a concessional method for computing business income, capital gains on the transfer of qualifying ships are not exempt from tax. - The reference to "block of qualifying assets" highlights the importance of maintaining a separate block for ships that qualify under the TTS, as opposed to other assets.

- The cross-reference to sections 67 and 74 (presumably the new provisions for capital gains computation and chargeability in the 2025 Bill) indicates that the general machinery for taxing capital gains applies, subject to modifications prescribed in the tonnage tax regime.

Ambiguity or Issues:

- The clause leaves open the exact mechanics of computation, which are clarified in subsequent sub-clauses and cross-referenced sections.

- The use of "as per sections 67 and 74" requires careful reading of those sections to understand the full scope, but the intention is clear: capital gains on qualifying assets are taxable, and the computation follows general rules with necessary modifications.

Clause 229(9): Modified Application of General Capital Gains Provisions

For the purposes of computing such profits or gains, as referred to in sub-section (8), the provisions of section 74 shall have effect as if for the words "written down value of the block of assets", the words "written down value of the block of qualifying assets" had been substituted.

Clause 229(9) introduces a crucial modification: while the general capital gains computation provisions (section 74) apply, wherever the phrase "written down value of the block of assets" appears, it is to be read as "written down value of the block of qualifying assets".

Interpretation and Legal Principle:

- The standard capital gains regime for depreciable assets (under the existing law, section 50 of the 1961 Act) is based on the concept of a block of assets and their written down value (WDV).

- Under the tonnage tax regime, it is necessary to distinguish between qualifying and non-qualifying assets, as only the former benefit from the concessional regime.

- This clause ensures that the computation of capital gains on the transfer of a qualifying ship is based on the WDV of the block of qualifying assets, not the entire block of ships or assets, thereby preventing distortion of gains or losses.

Ambiguity or Issues:

- There may be practical challenges in segregating the WDV of qualifying and non-qualifying assets, especially if assets move between blocks (addressed in earlier sub-clauses).

- The clause is clear in its intent and provides a direct legislative override to avoid interpretational disputes.

Clause 229(10): Definition of Written Down Value of Qualifying Assets

In this section, "written down value of the block of qualifying assets" means the written down value computed as per sub-section (2).

Clause 229(10) provides a definition for the term "written down value of the block of qualifying assets", linking it back to the computation method prescribed in sub-section (2) of Clause 229.

Interpretation and Legal Principle:

- The definition ensures that there is no ambiguity regarding the WDV to be used for capital gains computation.

- Sub-section (2) prescribes a formula for apportioning the WDV between qualifying and non-qualifying assets, thereby providing a clear basis for subsequent computations.

Ambiguity or Issues:

- The linkage to sub-section (2) is logical and necessary, but it requires taxpayers and authorities to meticulously apply the apportionment formula, which may involve complex calculations if there are frequent changes in the composition of qualifying and non-qualifying ships.

Practical Implications

The practical implications of Clause 229(8)-(10) are significant for shipping companies opting for the tonnage tax scheme:

• Clarity in Taxation: The provisions clarify that capital gains on the transfer of qualifying ships are taxable, removing any doubt that the concessional regime exempts such gains.
• Segregation of Assets: The mandatory segregation of qualifying and non-qualifying assets for both depreciation and capital gains purposes requires robust accounting and asset tracking systems.
• Compliance Burden: Shipping companies must ensure accurate computation of the WDV for each block, especially when assets are transferred between qualifying and non-qualifying status.
• Prevention of Tax Arbitrage: The provisions prevent the shifting of assets between blocks to manipulate gains or losses, thereby protecting the integrity of the tax base.
• Alignment with General Law: By aligning the computation with general capital gains provisions (with necessary modifications), the law ensures consistency and reduces litigation risk.

Comparative Analysis: Clause 229(8)-(10) vs. Section 115VN of Income-tax Act, 1961

Section 115VN of the Income-tax Act, 1961, serves as the precursor to Clause 229(8)-(10) and is worded as follows:

Any profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax in accordance with the provisions of section 45, read with section 50, and the capital gains so arising shall be computed in accordance with the provisions of sections 45 to 51: Provided that for the purpose of computing such profits or gains, the provisions of section 50 shall have effect as if for the words written down value of the block of assets, the words written down value of the block of qualifying assets had been substituted. Explanation. For the purposes of this Chapter, written down value of the block of qualifying assets means the written down value computed in accordance with the provisions of sub-section (2) of section 115VK.

Key Points of Comparison:

1. Chargeability and Computation:
   • Section 115VN: Refers to sections 45 (chargeability of capital gains) and 50 (computation for depreciable assets), and computation as per sections 45 to 51.
   • Clause 229(8): Refers to sections 67 and 74 (presumably the new equivalents in the 2025 Bill), and computation as per sections 67 to 81.
   • Analysis: The structure and intent remain the same, with the updated Bill aligning references to the new section numbers. The core principle-taxing gains from the transfer of qualifying ships as capital gains-remains unchanged.
2. Modification of General Provisions:
   • Section 115VN: Provides that section 50 (dealing with block of assets) shall be read as if "block of assets" refers to "block of qualifying assets".
   • Clause 229(9): Similarly, modifies section 74 to substitute "block of assets" with "block of qualifying assets".
   • Analysis: Both provisions introduce a legal fiction to ensure that only the WDV of qualifying assets is considered for capital gains computation, preventing cross-contamination with non-qualifying assets. The approach is preserved in the new Bill.
3. Definition of Written Down Value:
   • Section 115VN Explanation: Refers to computation as per section 115VK(2).
   • Clause 229(10): Refers to computation as per Clause 229(2).
   • Analysis: The cross-reference is updated to reflect the new legislative framework, but the substance is identical: the WDV is to be apportioned as per the prescribed formula.
4. Structural and Drafting Differences:
   • The 2025 Bill breaks down the provision into three sub-clauses for clarity, whereas Section 115VN is a single, compound section with a proviso and an explanation.
   • The new Bill uses updated section numbers, possibly reflecting a reorganization of the capital gains provisions in the new tax code.
   • There is greater clarity and ease of reference in the new Bill, which may aid in compliance and reduce interpretational disputes.

Substantive Parity: Despite the differences in structure and section references, the substantive law remains unchanged. Both provisions:

• Tax capital gains on the transfer of qualifying ships under the tonnage tax regime.
• Mandate the use of the WDV of the block of qualifying assets for computation.
• Provide a legal fiction to modify the general capital gains computation for depreciable assets.
• Define the WDV by reference to a specific apportionment formula.

Potential Improvements in the 2025 Bill: The 2025 Bill, by reorganizing and clarifying the provisions, may improve compliance and reduce ambiguity. The explicit breakdown into sub-clauses makes the law more accessible and user-friendly, especially for non-specialist readers.

Practical and Policy Implications

For shipping companies, the provisions in both the existing Act and the proposed Bill have the following implications:

• Tax Planning: Companies must carefully plan the acquisition, use, and transfer of ships to optimize tax outcomes within the constraints of the law.
• Accounting Systems: Robust systems are required to track the WDV of qualifying and non-qualifying assets, especially in cases where assets are moved between blocks.
• Regulatory Compliance: Accurate and timely compliance with disclosure and reporting requirements is essential to avoid disputes and penalties.
• Litigation Risk: The detailed apportionment and legal fiction reduce the scope for litigation, but disputes may still arise regarding the classification or movement of assets.
• Policy Consistency: The continuation of these provisions in the new Bill reflects policy consistency and provides certainty to the shipping industry.

Comparative Perspective: International Practices

The tonnage tax regime is not unique to India; several jurisdictions, including the UK, Singapore, and Greece, have similar regimes. Most such regimes provide for concessional taxation of shipping income but tax capital gains on ship transfers under normal rules. The Indian approach-taxing capital gains on qualifying ships by reference to a segregated block of assets-is consistent with international best practices and ensures that the concessional regime does not become a loophole for tax avoidance.

Conclusion

Clause 229(8) to (10) of the Income Tax Bill, 2025, represents a clear and logical evolution of the existing Section 115VN of the Income-tax Act, 1961. Both provisions serve to ensure that capital gains from the transfer of qualifying ships under the tonnage tax regime are appropriately taxed, using a modified version of the general capital gains computation rules to reflect the unique nature of the regime. The updated drafting in the 2025 Bill enhances clarity and accessibility without making substantive changes to the law. For stakeholders, the provisions underscore the need for meticulous asset tracking and compliance, while providing certainty and preventing tax arbitrage. Potential areas for further reform or judicial clarification could include guidance on the practical implementation of asset movement between qualifying and non-qualifying blocks, as well as clarification on the treatment of partial disposals or complex asset structures.

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Full Text:

Clause 229 Depreciation and gains relating to tonnage tax assets.

 

Dated: 14-5-2025