Legal and Practical Implications of Excluding Tonnage Tax Profits from Book Profits in Indian Shipping Taxation : Clause 228(16) of the Income Tax Bill, 2025 Vs. Section 115VO of the Income-tax Act, 1961

Clause 228 Relevant shipping income and exclusion from book profit.

Income Tax Bill, 2025

Introduction

The Indian taxation regime for shipping companies has long recognized the unique nature of the shipping business, particularly its international character and the complexities involved in the computation of taxable income. To address these, a special regime known as the tonnage tax system was introduced, allowing shipping companies to compute their taxable income based on the net tonnage of their ships rather than on the basis of regular profits and gains. This system is designed to provide certainty, simplicity, and global competitiveness to Indian shipping companies.

Two key statutory provisions govern the treatment of shipping income under the tonnage tax regime: Section 115VO of the Income-tax Act, 1961, and its proposed successor, Clause 228(16) of the Income Tax Bill, 2025. Both provisions deal with the exclusion of book profits or losses derived from the activities of a tonnage tax company from the computation of book profits for the purposes of Minimum Alternate Tax (MAT), previously u/s 115JB and, prospectively, u/s 206 of the new Bill.

This commentary provides an in-depth analysis of Clause 228(16) of the Income Tax Bill, 2025, its objectives, legal context, practical implications, and a detailed comparative analysis with Section 115VO of the Income-tax Act, 1961.

Objective and Purpose

The legislative intent behind both Section 115VO and Clause 228(16) is to ensure that the special tonnage tax regime for shipping companies is not undermined by the general provisions relating to the computation of book profits for MAT purposes. The tonnage tax regime aims to provide a globally competitive and administratively simple method for taxing shipping companies, aligning with international best practices. Subjecting tonnage tax companies to MAT on book profits, which may not correspond to their tonnage income, would defeat the purpose of the regime.

The exclusion of book profits or losses from tonnage tax activities from the computation of MAT ensures that shipping companies opting for the tonnage tax regime are taxed only on the tonnage income, as envisaged by the special provisions, and are not subjected to additional tax burdens under the MAT framework.

Detailed Analysis of Clause 228(16) of the Income Tax Bill, 2025

Text of Clause 228(16)

The book profit or loss derived from the activities of a tonnage tax company, referred to in sub-section (1), shall be excluded from the book profit of the company for the purposes of section 206.

Breakdown of Key Elements

1. Scope of Exclusion: The exclusion applies to book profit or loss derived from the activities of a tonnage tax company, as defined in sub-section (1) of Clause 228. These activities include both core and incidental shipping activities, as elaborated in sub-sections (3) and (7).
2. Reference to Section 206: The exclusion operates specifically for the purposes of section 206 of the Income Tax Bill, 2025, which is the successor provision to section 115JB of the Income-tax Act, 1961 (i.e., the MAT provision). This ensures that tonnage tax companies are not subjected to MAT on profits from their core and incidental shipping activities.
3. Linkage with Other Sub-sections: By referring to sub-section (1), Clause 228(16) ensures that the exclusion covers all relevant shipping income, as defined and circumscribed by the preceding sub-sections, including the limitations and qualifications imposed therein (for example, the cap on incidental income in sub-section (2), treatment of non-qualifying ships in sub-section (8), and transfer pricing adjustments in sub-sections (9)-(12)).

Interpretative Issues and Ambiguities

• Definition of "Book Profit": The term "book profit" is not defined within Clause 228 itself but is referenced in section 206. The interpretation of book profit for MAT purposes is crucial, as it determines the quantum of income to be excluded.
• Scope of Exclusion: The exclusion is limited to profits or losses "derived from the activities" referred to in sub-section (1). This raises questions about the treatment of income or losses from activities that are not strictly within the definition of core or incidental activities, or that exceed the prescribed thresholds (as in sub-section (2)).
• Interaction with Other Provisions: Clause 228 contains several provisions dealing with allocation of costs, depreciation, and transfer pricing adjustments. The correct computation of the amount to be excluded from book profits u/s 206 requires careful application of these provisions.
• Procedural Aspects: The mechanism for computing and reporting the exclusion, and the documentation required to substantiate the quantum of excluded profits or losses, are not specified and may be subject to further rules or guidance.

Practical Implications

For Shipping Companies

• Certainty and Simplicity: The exclusion ensures that shipping companies opting for the tonnage tax regime can compute their tax liability with certainty, without the risk of an additional MAT burden on book profits from their shipping activities.
• Global Competitiveness: By aligning with international tonnage tax regimes and avoiding double taxation (i.e., under both the tonnage tax and MAT), Indian shipping companies are placed on a competitive footing with their global peers.
• Compliance Requirements: Shipping companies must maintain robust documentation to demonstrate the quantum of profits or losses derived from qualifying activities, and ensure proper allocation of common costs, depreciation, and transfer pricing adjustments as per Clause 228.

For Tax Authorities

• Audit and Verification: The tax authorities must ensure that the exclusion is correctly claimed and that only eligible profits or losses are excluded. This may involve scrutiny of the classification of activities, allocation of costs, and application of transfer pricing adjustments.
• Potential for Disputes: Ambiguities in the definition of qualifying activities, allocation of costs, and determination of market value for intra-group transfers may give rise to disputes and litigation.

For Policymakers

• Alignment with Policy Objectives: The provision supports the policy objective of promoting the Indian shipping industry and attracting tonnage to the Indian registry.
• Revenue Impact: The exclusion reduces the potential tax base under MAT, but this is a deliberate trade-off to achieve broader economic objectives.

Comparative Analysis: Clause 228(16) vs. Section 115VO

Text of Section 115VO

The book profit or loss derived from the activities of a tonnage tax company, referred to in sub-section (1) of section 115V-I, shall be excluded from the book profit of the company for the purposes of section 115JB.

Key Similarities

• Substantive Effect: Both provisions achieve the same substantive result: the exclusion of book profits or losses from tonnage tax activities from the computation of book profits for MAT purposes.
• Reference to Definitional Sub-section: Both provisions refer to a definitional sub-section (sub-section (1) of the relevant section) to determine the scope of activities covered by the exclusion.
• Purpose: Both are designed to prevent the tonnage tax regime from being undermined by the MAT provisions, thus maintaining the integrity of the special regime for shipping companies.

Key Differences

• Reference to MAT Section: Section 115VO refers to section 115JB (the MAT provision under the 1961 Act), whereas Clause 228(16) refers to section 206 (the corresponding MAT provision under the 2025 Bill). This is a structural change reflecting the reorganization and renumbering of provisions in the new Bill.
• Scope of Activities: The scope of "activities" from which book profits or losses are to be excluded is determined by reference to sub-section (1) of section 115V-I (in the 1961 Act) or sub-section (1) of Clause 228 (in the 2025 Bill). While the basic approach is the same, the detailed definitions and scope of core and incidental activities, as well as limitations and adjustments, are more elaborately set out in Clause 228 than in the earlier provisions.
• Integration with Other Provisions: Clause 228 is more detailed and comprehensive in defining core and incidental activities, setting limits on incidental income, dealing with non-qualifying ships, and specifying rules for allocation of costs and transfer pricing adjustments. Section 115VO, by contrast, is a brief exclusionary provision, relying on the definitions and computations set out in section 115V-I and related sections.
• Legislative Drafting: Clause 228(16) is part of a broader and more integrated legislative framework in the 2025 Bill, reflecting lessons learned from the operation of the tonnage tax regime under the 1961 Act. This may provide greater clarity and reduce interpretive disputes.

Comparison Table

Aspect	Section 115VO of the income tax Act, 1961	Clause 228(16) of the Income-tax Bill,  2025
Reference to MAT	Section 115JB	section 206
Scope of Activities	As per section 115V-I(1)	As per Clause 228(1), with detailed sub-sections
Definition of Core/Incidental Activities	Basic definitions in section 115V-I	Detailed definitions and limits in Clause 228(3)-(7)
Adjustments for Transfers/Allocation	Handled in related sections (115VJ, 115VK, etc.)	Integrated within Clause 228 (sub-sections (9)-(15))
Procedural Clarity	Relies on existing procedures	Potential for new rules/guidance under the 2025 Bill

Analysis of Legislative Evolution

The move from Section 115VO to Clause 228(16) reflects a broader legislative evolution. The 2025 Bill seeks to consolidate, clarify, and modernize the income tax law, including the provisions applicable to shipping companies. By integrating the exclusion provision within a more comprehensive framework (Clause 228), the new Bill aims to provide greater clarity, reduce litigation, and ensure that the special regime for shipping companies is robust and future-proof.

The detailed definitions and mechanisms in Clause 228 address several practical issues that have arisen under the 1961 Act, such as the treatment of incidental income, allocation of common costs, and intra-group transfers. By bringing these within a single, integrated provision, the 2025 Bill enhances administrative efficiency and taxpayer certainty.

Practical Issues and Potential Challenges

1. Classification of Activities

Proper classification of income as arising from core or incidental activities is crucial. Disputes may arise regarding whether certain activities (e.g., logistics, agency services, or ancillary services) qualify as core or incidental, and whether income from such activities falls within the exclusion.

2. Allocation of Costs and Depreciation

Where a tonnage tax company has both qualifying and non-qualifying activities, the allocation of common costs and depreciation may be contentious. The Assessing Officer is given discretion to determine reasonable allocations, which may lead to differing interpretations and potential litigation.

3. Transfer Pricing Adjustments

Clause 228 includes provisions for adjusting the computation of relevant shipping income in cases of intra-group transfers or arrangements that result in more than ordinary profits. The application of these provisions requires careful documentation and may be subject to challenge by tax authorities.

4. Losses from Shipping Activities

Clause 228(13) provides that losses from relevant shipping income are to be ignored for the purposes of computing tonnage income. This reinforces the principle that the tonnage tax regime is a presumptive regime, and losses from shipping activities do not reduce the tonnage income or affect the exclusion from book profits.

5. Compliance and Documentation

To avail the exclusion under Clause 228(16), shipping companies must maintain detailed records of income, expenses, and allocations relating to qualifying activities. Failure to do so may result in denial of the exclusion or adjustments by tax authorities.

Comparative Analysis with International Practice

The tonnage tax regime, and the exclusion of book profits from MAT, is consistent with international practice. Many maritime jurisdictions, including the United Kingdom, Singapore, and the Netherlands, operate tonnage tax regimes that provide certainty and simplicity for shipping companies, and exclude such companies from alternative minimum tax regimes or similar provisions.

The Indian regime, as reflected in Clause 228(16), is broadly in line with these international models, ensuring that Indian shipping companies are not disadvantaged in the global marketplace.

Conclusion

Clause 228(16) of the Income Tax Bill, 2025, represents a continuation and refinement of the policy underlying Section 115VO of the Income-tax Act, 1961. By excluding book profits or losses from qualifying shipping activities from the computation of book profits for MAT purposes, the provision preserves the integrity and effectiveness of the tonnage tax regime for shipping companies.

The 2025 Bill enhances the legislative framework by providing more detailed definitions, mechanisms for allocation and adjustment, and integration with related provisions. This should reduce ambiguities and disputes, and provide greater certainty for both taxpayers and tax authorities.

Going forward, it will be important for the government to provide clear rules and guidance on the computation and documentation requirements for claiming the exclusion, and for tax authorities and taxpayers to work collaboratively to ensure the smooth operation of the regime. Judicial clarification may be required in cases of dispute, particularly regarding the classification of activities and allocation of costs.

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Full Text:

Clause 228 Relevant shipping income and exclusion from book profit.

 

Dated: 14-5-2025