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TMI BlogDefining the Qualifying Company under India's Tonnage Tax Regime : Clause 235(h) of the Income Tax Bill, 2025 Vs. Section 115VC of the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 establish the criteria for what constitutes a qualifying company eligible for the tonnage tax scheme. This commentary provides a detailed analysis of Clause 235(h), examining its structure, intent, and implications, and then undertakes a comparative analysis with Section 115VC, highlighting continuities, innovations, and potential legal consequences. Objective and Purpose The tonnage tax regime was introduced in India to align the tax treatment of domestic shipping companies with international standards, thereby enhancing their competitiveness. The core objective behind defining a "qualifying company" is to ensure that only genuine shipping businesses, with substantial operations and management in India, benefit from the conces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions may be made by executives rather than the board, and seeks to capture the real locus of management. * Ownership of at Least One Qualifying Ship: The company must own at least one "qualifying ship," as defined in Clause 235(i). This ensures a substantive link to shipping operations, preventing mere paper companies from accessing the scheme. * Main Object: Operating Ships: The company's main object must be to carry on the business of operating ships. This requirement is designed to exclude companies with only incidental or secondary shipping activities. Interpretive Provisions: Clause 235(h) includes a detailed explanation of POEM, mirroring international tax concepts and aligning with India's anti-avoidance measures. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainty, promote transparency, and foster investor confidence in the Indian shipping sector. Compliance and Procedural Impact: Companies must maintain documentation evidencing the locus of management decisions and ensure that their main object, as reflected in their Memorandum of Association and actual activities, is the operation of ships. Comparative Analysis: Clause 235(h) vs. Section 115VC Textual Comparison Section 115VC of the Income-tax Act, 1961 provides: * (a) The company is an Indian company; * (b) The place of effective management is in India; * (c) It owns at least one qualifying ship; and * (d) The main object is to carry on the business of operating ships. The explanation to Section 115VC defines POEM in identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initions. * Drafting Clarity: The Bill's language is more explicit in certain respects, and the definitions are grouped to minimize ambiguity and facilitate interpretation. Legal and Policy Implications * Substantive Similarity: Despite the updated context and drafting, the substantive criteria for qualifying company status remain unchanged. This reflects legislative satisfaction with the existing regime's effectiveness in targeting the intended class of companies. * Enhanced Clarity: The grouping of definitions in Clause 235, including Clause 235(h), is likely to reduce interpretive disputes and litigation regarding eligibility for the tonnage tax scheme. * Potential for Broader Coverage: The inclusion of inland vessels an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. * Ownership vs. Operation: The requirement of ownership of at least one qualifying ship may exclude companies that operate ships under long-term charters but do not own them, potentially raising questions about the scope of eligibility. Practical Compliance Considerations * Documentary Evidence: Companies must maintain robust records demonstrating that board or executive decisions are made in India, and that shipping operations are the main business. * Corporate Structure: Group entities with complex ownership or management structures must carefully assess whether they meet the POEM and ownership requirements. * Regulatory Alignment: Companies operating both seagoing and inland vessels must ensure compliance with the relevant re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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