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TMI BlogCapital Gains taxation on Qualifying Ships : Clause 229(8) to (10) of the Income Tax Bill, 2025 Vs. Section 115VN of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... her than the traditional income computation under normal provisions. The Income Tax Bill, 2025, continues this legacy by proposing a comprehensive regime under Clause 229 for the treatment of depreciation and capital gains relating to tonnage tax assets. Clause 229(8) to (10) of the Income Tax Bill, 2025, specifically addresses the taxation of profits or gains arising from the transfer of capital assets, i.e., qualifying ships or vessels, and delineates the treatment of such gains under the tonnage tax regime. These provisions are a direct evolution of Section 115VN of the Income-tax Act, 1961, which currently governs the chargeability and computation of gains from the transfer of tonnage tax assets. This commentary provides a detailed, ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Transfer of Qualifying Assets Any profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax as per sections 67 and 74, and the capital gains so arising shall be computed as per sections 67 to 81. Clause 229(8) establishes the foundational rule that any profits or gains resulting from the transfer (i.e., sale, exchange, or relinquishment) of a capital asset, specifically an asset forming part of the block of qualifying assets, are chargeable to income-tax. The computation and chargeability are to be done in accordance with sections 67 and 74 (and for computation, sections 67 to 81). Interpretation and Legal Principle: - The clause ensur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation provisions (section 74) apply, wherever the phrase "written down value of the block of assets" appears, it is to be read as "written down value of the block of qualifying assets". Interpretation and Legal Principle: - The standard capital gains regime for depreciable assets (under the existing law, section 50 of the 1961 Act) is based on the concept of a block of assets and their written down value (WDV). - Under the tonnage tax regime, it is necessary to distinguish between qualifying and non-qualifying assets, as only the former benefit from the concessional regime. - This clause ensures that the computation of capital gains on the transfer of a qualifying ship is based on the WDV of the block of qualifying assets, not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) are significant for shipping companies opting for the tonnage tax scheme: * Clarity in Taxation: The provisions clarify that capital gains on the transfer of qualifying ships are taxable, removing any doubt that the concessional regime exempts such gains. * Segregation of Assets: The mandatory segregation of qualifying and non-qualifying assets for both depreciation and capital gains purposes requires robust accounting and asset tracking systems. * Compliance Burden: Shipping companies must ensure accurate computation of the WDV for each block, especially when assets are transferred between qualifying and non-qualifying status. * Prevention of Tax Arbitrage: The provisions prevent the shifting of assets between blocks to manipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 229(8): Refers to sections 67 and 74 (presumably the new equivalents in the 2025 Bill), and computation as per sections 67 to 81. * Analysis: The structure and intent remain the same, with the updated Bill aligning references to the new section numbers. The core principle-taxing gains from the transfer of qualifying ships as capital gains-remains unchanged. * Modification of General Provisions: * Section 115VN: Provides that section 50 (dealing with block of assets) shall be read as if "block of assets" refers to "block of qualifying assets". * Clause 229(9): Similarly, modifies section 74 to substitute "block of assets" with "block of qualifying assets". * Analysis: Both provisions introduce a legal fiction to ensure that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Improvements in the 2025 Bill: The 2025 Bill, by reorganizing and clarifying the provisions, may improve compliance and reduce ambiguity. The explicit breakdown into sub-clauses makes the law more accessible and user-friendly, especially for non-specialist readers. Practical and Policy Implications For shipping companies, the provisions in both the existing Act and the proposed Bill have the following implications: * Tax Planning: Companies must carefully plan the acquisition, use, and transfer of ships to optimize tax outcomes within the constraints of the law. * Accounting Systems: Robust systems are required to track the WDV of qualifying and non-qualifying assets, especially in cases where assets are moved between blocks. * Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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