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TMI Blogcompetitive taxation structure for shipping companies : Clause 228(14) and (15) of the Income Tax Bill, 2025 Vs. Section 115VJ of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... gime has been governed by a series of provisions, notably sections 115V to 115VZC in Chapter XII-G of the Income-tax Act, 1961. Among these, Section 115VJ specifically addresses the treatment of common costs and the allocation of depreciation for assets not exclusively used in the tonnage tax business. The Income Tax Bill, 2025, currently under consideration, proposes a revised and consolidated approach to the taxation of shipping companies. Clause 228 of the Bill encapsulates the special provisions relating to the income of shipping companies, with sub-clauses (14) and (15) directly corresponding to the issues of common cost allocation and depreciation apportionment. This commentary undertakes a detailed analysis of these sub-clauses, com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. The use of the phrase "reasonable basis" is significant, as it provides flexibility to account for the diverse operational structures of shipping companies. The provision does not prescribe a specific formula or method, leaving room for the adoption of various allocation keys, such as turnover, asset usage, time spent, or any other rational basis relevant to the facts of the case. * The open-ended nature of "reasonable basis" is both a strength and a weakness. It allows for tailored solutions that reflect commercial reality but may also result in disputes between taxpayers and the tax authorities regarding what is "reasonable" in a given context. The provision, however, is consistent with established legal principles that require e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision requires the AO to consider the actual usage of the asset-possibly measured in terms of time, output, or another relevant factor. For example, if an office building is used 60% for the tonnage tax business and 40% for other activities, depreciation would be apportioned accordingly. The lack of a statutory formula means that companies must maintain detailed usage records, and that disputes may arise regarding the appropriate basis of allocation. * The phrase "fair proportion" is intended to ensure equity and prevent either overstatement or understatement of depreciation in the computation of tonnage income or regular business income. The AO's decision is subject to appellate review if disputed. 3. Section 115VJ of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may reduce regular taxable income, while under-allocation may increase it. * Audit and Litigation: These provisions are potential flashpoints for audit scrutiny and litigation, as they directly affect the taxable base. Companies must be prepared to justify their allocation methods and data. * Effect on Business Structure: Companies may be incentivized to segregate tonnage tax and non-tonnage tax businesses more clearly, or to structure asset ownership and usage to minimize allocation disputes. Comparative Analysis: Clause 228(14)/(15) vs. Section 115VJ Aspect Clause 228(14)/(15) of the Income Tax Bill, 2025 Section 115VJ of the Income-tax Act, 1961 Analysis Common Costs Common costs attributable to the tonnage tax busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure consistency and minimize disputes. * Judicial Interpretation: Past judicial pronouncements on Section 115VJ will remain relevant for interpreting the new provisions, unless the context or language materially changes. * Potential for Reform: Stakeholders may argue for more detailed rules or safe harbors to reduce uncertainty and compliance costs. Comparative Perspective: International Practices Many jurisdictions with tonnage tax regimes (e.g., the UK, Singapore, Greece) also provide for the segregation of shipping and non-shipping income, and require reasonable allocation of shared costs. The Indian approach, emphasizing reasonableness and AO discretion, is broadly consistent with international norms, although some countries provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inked incentives. Stakeholder Impact The primary stakeholders affected are: * Shipping Companies: Must ensure robust accounting and documentation to support allocation of costs and depreciation. Strategic decisions regarding asset usage and business structure may be influenced by these provisions. * Tax Authorities: Must exercise judgment in evaluating allocations, balancing revenue protection with administrative feasibility. Training and standardized guidelines may be beneficial. * Advisors and Auditors: Play a crucial role in advising clients and certifying the reasonableness of allocations, potentially facing professional liability for errors. * Policymakers: May need to monitor the practical impact and consider more detailed r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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