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TMI BlogContinuity and Change in India's Tonnage Tax Regime : Clause 226(1) of the Income Tax Bill, 2025 Vs. Section 115VB of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of the Income Tax Bill, 2025 ("the Bill") proposes to define the scope of "operating a ship or inland vessel" for the purposes of the tonnage tax scheme. This clause is central to determining which companies may opt for the tonnage tax regime and how their income is to be computed. The provision draws from, and seeks to update, the existing Section 115VB of the Income-tax Act, 1961 ("the Act"), which currently governs the same subject. This commentary undertakes a comprehensive analysis of Clause 226(1), situates it within the broader legislative framework, elucidates its objectives and implications, and provides a detailed comparative analysis with Section 115VB. The analysis also considers the practical and policy dimensions of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el" for the purposes of the tonnage tax scheme. The clause reads as follows: "In this Part, a company shall- (a) be regarded as operating a ship or inland vessel, as the case may be, if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship or inland vessel, as the case may be, has been chartered in by it in an arrangement such as slot charter, space charter or joint charter; and (b) not be regarded as operating a ship or inland vessel, as the case may be, which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years." Let us break down and analyze each component: (a) Positive Test: What Constitutes Operating a Ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies that bear the operational risks and responsibilities of shipping. When a vessel is chartered out on a long-term BBC or BBCD, the owner is essentially a financier rather than an operator, and thus should not benefit from the tonnage tax regime. Key Features and Interpretive Issues * Comprehensive Coverage: By including both owned and chartered vessels, and even partial charters, the provision ensures that the tonnage tax regime is accessible to a broad spectrum of shipping businesses. * Potential Ambiguities: The phrase "such as slot charter, space charter or joint charter" is illustrative, not exhaustive. However, ambiguity may arise regarding newer or hybrid chartering arrangements. Guidance or rules may be needed for clarity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cords of ownership, chartering arrangements, and periods of charter to substantiate their eligibility. Tax authorities are likely to scrutinize arrangements that may be designed to artificially qualify for the regime. * Support for Inland Waterways: The inclusion of inland vessels can catalyze investment in this sector, which is a government policy priority for reducing logistics costs and environmental impact. * Exclusion of Passive Owners: Ship owners who do not take operational risks (e.g., by chartering out on long-term bareboat terms) are excluded, ensuring that the regime supports active shipping businesses. * Tax Planning: Companies may need to revisit their fleet deployment and chartering strategies to maximize the benefits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of Divergence * Structural Placement: Clause 226(1) is situated within a new legislative framework (the Income Tax Bill, 2025), which may contain other changes affecting the tonnage tax regime as a whole. * Drafting Clarity: The Bill's use of sub-clauses (a) and (b) may enhance clarity, but the substantive effect is unchanged. * Policy Context: The Bill may reflect a renewed policy emphasis on inland waterways and modernization of the tonnage tax scheme, though the core definition remains the same. Policy and Administrative Implications * Continuity and Certainty: By retaining the core definition, policymakers ensure stability and predictability for the shipping sector. * Potential for Further Reform: The recasting of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth owned and chartered vessels. * Recognize partial charters (slot/space charters). * Exclude vessels chartered out on long-term bareboat terms. This alignment is important for ensuring the competitiveness of Indian shipping companies in the global market. Practical and Procedural Impacts For Businesses * Eligibility Planning: Shipping companies must monitor their chartering arrangements to remain eligible for the tonnage tax scheme. * Documentation: Detailed agreements and operational records will be essential to demonstrate compliance. * Strategic Decisions: Companies may choose to avoid long-term bareboat charters to retain eligibility. For Tax Authorities * Enforcement: Authorities must scrutinize arrangements to preven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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