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TMI BlogExclusion of Deductions and Loss Set-Off under the Tonnage Tax Regime : Clause 230(1) of the Income Tax Bill, 2025 Vs. Section 115VL of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... cations, the existing framework u/s 115VL of the Income-tax Act, 1961. Both provisions are designed to ensure that the tonnage tax regime operates as a self-contained code, distinct from the general provisions for computation of business income under the Act. The tonnage tax regime represents a shift from the traditional system of taxing shipping companies on their actual profits, instead taxing them on the notional income computed with reference to the net tonnage of qualifying ships operated. This specialized regime aims to provide certainty, simplicity, and international competitiveness to Indian shipping companies. This commentary provides a structured and detailed analysis of Clause 230(1), examining its objectives, operative provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) is structured into four principal sub-clauses (a) to (d), each corresponding closely to the four sub-clauses of Section 115VL. A detailed breakdown and analysis of each provision follows, with a comparative lens. 1. Application of Loss, Allowance, or Deduction Provisions [Clause 230(1)(a) vs. Section 115VL(i)] Textual Comparison: * Clause 230(1)(a): Applies sections 28 to 52 as if every loss, allowance, or deduction referred to therein and relating to or allowable for any of the relevant tax years had been given full effect to for that tax year itself. * Section 115VL(i): Applies sections 30 to 43B as if every loss, allowance, or deduction referred to therein and relating to or allowable for any of the relevant previous years had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry Forward or Set-Off of Losses [Clause 230(1)(b) vs. Section 115VL(ii)] Textual Comparison: * Clause 230(1)(b): Prohibits the carry forward or set-off of losses referred to in sections 108(1) or (2)(a), 109, 112(1), or 116(1), in so far as such loss relates to the business of operating qualifying ships, for any tax years when the company is under the tonnage tax scheme. * Section 115VL(ii): Prohibits the carry forward or set-off of losses referred to in sub-sections (1) and (3) of section 70, sub-sections (1) and (2) of section 71, section 72(1), and section 72A(1), in so far as such loss relates to the business of operating qualifying ships for any previous years under the scheme. Analysis: Both provisions seek to ring-fence the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicability of deductions under Chapter VI-A (1961 Act) or Chapter VIII (2025 Bill) to the profits derived from the tonnage tax business. These chapters typically contain deductions for various investments, donations, and other specified expenditures (e.g., sections 80C to 80U in the 1961 Act). By excluding these deductions, the legislation ensures that the tonnage tax regime remains a notional, concessional basis of taxation, and is not further reduced by general deductions available to other businesses. The change in chapter reference is a result of the reorganization of the statute and does not alter the substantive effect of the provision. 4. Computation of Depreciation Allowance [Clause 230(1)(d) vs. Section 115VL(iv)] Textual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies: The regime offers simplicity and predictability, as the computation of taxable income is delinked from actual profits and losses. However, companies must carefully consider the loss of ability to carry forward or set off losses and the ineligibility for deductions under other chapters. * For tax administration: The self-contained nature of the tonnage tax regime reduces disputes and compliance costs, as the scope for litigation over deductions, allowances, and set-offs is minimized. * For advisors and auditors: There is a need to ensure proper tracking of asset values and pre-option losses, and to advise clients on the optimal timing and implications of opting into the regime. * On transitional issues: The new sub-sections (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to be given effect, particularly for items not previously covered u/ss 30-43B. * The apportionment mechanism in sub-section (4) of Clause 230 may require further guidance or rules to ensure consistency and fairness in practice. * Companies with complex group structures or diversified operations may face challenges in segregating shipping business losses and assets for the purposes of these provisions. Practical Implications for Stakeholders The exclusionary approach adopted by both Clause 230(1) and Section 115VL has several practical implications: * Strategic Tax Planning: Companies must weigh the benefits of the tonnage tax regime against the loss of flexibility in loss set-off and deductions. Entry into the regime is general ..... X X X X Extracts X X X X X X X X Extracts X X X X
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