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TMI BlogInterpreting Special Provisions for Shipping Companies : Clause 235 of the Income Tax Bill, 2025 Vs. Section 115V of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... 5V (including recent amendments), and discuss the implications for stakeholders and the broader policy context. 2. Objective and Purpose The legislative intent behind both Clause 235 and Section 115V is to provide a clear, uniform set of definitions to facilitate the operation of the tonnage tax scheme. The tonnage tax regime was introduced in 2004 to offer shipping companies an alternative to the traditional corporate tax system, thereby enhancing the competitiveness of Indian shipping companies and aligning domestic law with international best practices. The definitional clarity ensures that only genuine shipping activities benefit from the scheme, preventing misuse while providing certainty to taxpayers and administrators. The inclusion of new terms and refinement of existing ones in Clause 235 reflects the evolving nature of the shipping industry, regulatory environment, and legislative policy. 3. Detailed Analysis of Key Provisions a) "Bareboat Charter" and "Bareboat Charter-cum-Demise" Both Clause 235(a) and Section 115V(a)-(b) define "bareboat charter" as the hiring of a ship or inland vessel for a stipulated period, granting the charterer possession and control, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limiting it to commercial shipping. f) "Qualifying Company" This is one of the most critical definitions. Clause 235(h) provides a detailed definition, requiring that a "qualifying company": * is an Indian company; * has its place of effective management (POEM) in India; * owns at least one qualifying ship; and * has as its main object the business of operating ships. For POEM, it further clarifies that it is where the board or executive directors make decisions, or where executive directors/officers perform their functions if the board merely approves their decisions. Section 115V(g) simply refers to "a company referred to in section 115VC," which in turn lays down similar conditions regarding Indian residency, ship ownership, and business object. However, Clause 235(h) directly incorporates the POEM criteria, aligning with international tax concepts and Indian tax law developments (notably, the introduction of POEM in the Income-tax Act for determining residency). This explicit inclusion and elaboration of POEM in the 2025 Bill reflects a move towards greater clarity and alignment with global anti-avoidance standards, minimizing the risk of treaty shopping or artifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in Eligibility: The detailed definition of "qualifying company" and "qualifying ship" reduces ambiguity, making it easier for companies to assess their eligibility and for tax authorities to enforce compliance. * Alignment with International Standards: The explicit reference to POEM aligns the Indian regime with international anti-avoidance standards, reducing the risk of base erosion and profit shifting. * Exclusion of Non-qualifying Activities: The specific exclusion of certain vessels and activities (e.g., fishing, pleasure crafts, offshore installations) ensures that the tax benefit is targeted at commercial shipping, preventing abuse of the regime. * Administrative Efficiency: Self-contained and precise definitions reduce the need for cross-referencing, simplifying compliance and administration. 5. Comparative Analysis with Section 115V of the Income-tax Act, 1961 Section 115V, as amended, contains definitions that closely mirror those in Clause 235. However, there are subtle but important differences, as well as some clarifications and expansions in the 2025 Bill: a. Structure and Scope Section 115V provides definitions "unless the context otherwise requires" and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine these terms similarly, referring to qualifying companies that have opted for the tonnage tax regime and the statutory scheme for computation of profits and gains. g. Other Definitions Definitions such as "factory ship", "fishing vessel", "pleasure craft", and "seagoing ship" are largely identical, with appropriate cross-references to the relevant maritime statutes. h. Legislative Evolution and Policy Continuity The amendments to Section 115V (effective from 1 April 2026) and the provisions of Clause 235 demonstrate a policy of continuity, with refinements to improve clarity, close loopholes, and expand the regime to inland waterway vessels. The explicit incorporation of POEM criteria and detailed exclusions reflect lessons learned from the operation of the regime since its inception in 2004. 6. Practical and Legal Implications The refined definitions in Clause 235 are likely to have the following practical and legal impacts: * Greater Certainty: Shipping companies will benefit from clearer eligibility criteria, reducing the risk of disputes and litigation. * Compliance Burden: The requirement for documentation (e.g., net tonnage certificates, POEM evidence) may increa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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