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TMI BlogLegal and Practical Implications of Excluding Tonnage Tax Profits from Book Profits in Indian Shipping Taxation : Clause 228(16) of the Income Tax Bill, 2025 Vs. Section 115VO of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... ced, allowing shipping companies to compute their taxable income based on the net tonnage of their ships rather than on the basis of regular profits and gains. This system is designed to provide certainty, simplicity, and global competitiveness to Indian shipping companies. Two key statutory provisions govern the treatment of shipping income under the tonnage tax regime: Section 115VO of the Income-tax Act, 1961, and its proposed successor, Clause 228(16) of the Income Tax Bill, 2025. Both provisions deal with the exclusion of book profits or losses derived from the activities of a tonnage tax company from the computation of book profits for the purposes of Minimum Alternate Tax (MAT), previously u/s 115JB and, prospectively, u/s 206 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n applies to book profit or loss derived from the activities of a tonnage tax company, as defined in sub-section (1) of Clause 228. These activities include both core and incidental shipping activities, as elaborated in sub-sections (3) and (7). * Reference to Section 206: The exclusion operates specifically for the purposes of section 206 of the Income Tax Bill, 2025, which is the successor provision to section 115JB of the Income-tax Act, 1961 (i.e., the MAT provision). This ensures that tonnage tax companies are not subjected to MAT on profits from their core and incidental shipping activities. * Linkage with Other Sub-sections: By referring to sub-section (1), Clause 228(16) ensures that the exclusion covers all relevant shipping in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shipping Companies * Certainty and Simplicity: The exclusion ensures that shipping companies opting for the tonnage tax regime can compute their tax liability with certainty, without the risk of an additional MAT burden on book profits from their shipping activities. * Global Competitiveness: By aligning with international tonnage tax regimes and avoiding double taxation (i.e., under both the tonnage tax and MAT), Indian shipping companies are placed on a competitive footing with their global peers. * Compliance Requirements: Shipping companies must maintain robust documentation to demonstrate the quantum of profits or losses derived from qualifying activities, and ensure proper allocation of common costs, depreciation, and transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (sub-section (1) of the relevant section) to determine the scope of activities covered by the exclusion. * Purpose: Both are designed to prevent the tonnage tax regime from being undermined by the MAT provisions, thus maintaining the integrity of the special regime for shipping companies. Key Differences * Reference to MAT Section: Section 115VO refers to section 115JB (the MAT provision under the 1961 Act), whereas Clause 228(16) refers to section 206 (the corresponding MAT provision under the 2025 Bill). This is a structural change reflecting the reorganization and renumbering of provisions in the new Bill. * Scope of Activities: The scope of "activities" from which book profits or losses are to be excluded is determined by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation Handled in related sections (115VJ, 115VK, etc.) Integrated within Clause 228 (sub-sections (9)-(15)) Procedural Clarity Relies on existing procedures Potential for new rules/guidance under the 2025 Bill Analysis of Legislative Evolution The move from Section 115VO to Clause 228(16) reflects a broader legislative evolution. The 2025 Bill seeks to consolidate, clarify, and modernize the income tax law, including the provisions applicable to shipping companies. By integrating the exclusion provision within a more comprehensive framework (Clause 228), the new Bill aims to provide greater clarity, reduce litigation, and ensure that the special regime for shipping companies is robust and future-proof. The detailed definitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the purposes of computing tonnage income. This reinforces the principle that the tonnage tax regime is a presumptive regime, and losses from shipping activities do not reduce the tonnage income or affect the exclusion from book profits. 5. Compliance and Documentation To avail the exclusion under Clause 228(16), shipping companies must maintain detailed records of income, expenses, and allocations relating to qualifying activities. Failure to do so may result in denial of the exclusion or adjustments by tax authorities. Comparative Analysis with International Practice The tonnage tax regime, and the exclusion of book profits from MAT, is consistent with international practice. Many maritime jurisdictions, including the United Kin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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