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TMI BlogComprehensive Review of the Tonnage Tax Scheme : Clause 226(7) of the Income Tax Bill, 2025 Vs. Section 115VF of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the traditional net profit-based taxation. This commentary provides a comprehensive analysis of Clause 226(7), including its context, objectives, detailed provisions, practical implications, and a comparative evaluation with the existing Section 115VF. The analysis draws attention to the legislative intent, interpretive nuances, and possible areas of convergence and divergence between the two regimes. 2. Objective and Purpose 2.1 Legislative Intent The core objective of both Clause 226(7) and Section 115VF is to provide a favorable and simplified tax regime for shipping companies, recognizing the unique nature of their business operations. The tonnage tax scheme (TTS) enables qualifying shipping companies to compute their taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head "Profits and gains of business or profession"; and * the relevant shipping income referred to in section 228(1) shall not be chargeable to tax. This provision is embedded within a comprehensive framework (Clause 226(1)-(6)), which sets out the scope, eligibility, and procedural requirements of the tonnage tax scheme. Sub-clause (7) specifically addresses the computation and taxability of "tonnage income" and the exemption of "relevant shipping income." 3.2 Breakdown and Interpretation * Computation as per Section 227: Clause 226(7)(a)(i) mandates that the "tonnage income" must be computed in accordance with Section 227. Although Section 227 is not reproduced here, it is expected to lay down the methodology for calculating n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip criteria, and the separation of tonnage tax business from other activities. 3.4 Ambiguities and Interpretive Issues While the language of Clause 226(7) is largely clear, potential ambiguities may arise concerning: * The precise scope of "relevant shipping income" u/s 228(1), especially if the definition is expanded or altered from the 1961 Act. * Interaction with other tax provisions, such as Minimum Alternate Tax (MAT) or provisions relating to international shipping income. * Procedural safeguards to prevent abuse or misclassification of income. 4. Practical Implications 4.1 Impact on Stakeholders * Shipping Companies: The tonnage tax scheme continues to offer shipping companies a predictable, low-compliance, and competit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed in accordance with section 115VG and the income so computed shall be deemed to be the profits chargeable under the head "Profits and gains of business or profession" and the relevant shipping income referred to in sub-section (1) of section 115V-I shall not be chargeable to tax. A side-by-side comparison reveals that Clause 226(7) essentially mirrors the substance of Section 115VF, with only minor differences in cross-references (i.e., Section 227 vs. Section 115VG; Section 228(1) vs. Section 115V-I(1)), which are a result of the restructuring and renumbering in the new Bill. 5.2 Substantive Parity * Computation Mechanism: Both provisions anchor the computation of tonnage income to a separate section (Section 227/115VG), whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pore, and other maritime jurisdictions. The legal fiction of "deemed profits" and the exclusion of actual income are standard features globally, designed to provide certainty and prevent disputes over expense allocation and transfer pricing. 5.5 Potential Issues and Conflicts * Interaction with Other Tax Provisions: Issues may arise regarding the interaction of tonnage tax provisions with MAT, transfer pricing, or anti-avoidance rules. The legislative framework must ensure that the notional nature of tonnage income is respected across other tax computations. * Ambiguity in Definitions: Any change in the definition of "qualifying ship," "relevant shipping income," or "operating a ship" could have significant implications. The Bill' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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