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TMI BlogEvolving Compliance Obligations under the Tonnage Tax Scheme: Clause 232(1)-(11) of the Income Tax Bill, 2025 Vs. Section 115VT of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... focusing on the creation and utilization of the Tonnage Tax Reserve Account. These provisions are designed to ensure that companies benefiting from the tonnage tax regime reinvest a portion of their profits in the shipping sector, thereby contributing to the growth and modernization of the national fleet. Section 115VT of the Income-tax Act, 1961, currently governs similar conditions for the applicability of the tonnage tax scheme, particularly concerning the transfer of profits to a reserve account and its subsequent utilization. The 2025 Bill, while largely retaining the core structure and intent of Section 115VT, introduces several nuanced changes and clarifications that reflect evolving policy objectives and practical considerations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)-(11) and Comparison with Section 115VT 1. Requirement to Credit Profits to Tonnage Tax Reserve Account [Clause 232(1) vs. Section 115VT(1)] Clause 232(1): Mandates that a tonnage tax company must credit to the Tonnage Tax Reserve Account at least 20% of the book profit derived from qualifying shipping activities every tax year. The credited amount must be utilized in accordance with sub-section (6). Section 115VT(1): Contains a similar requirement, stipulating a minimum of 20% of book profit to be credited to the reserve account. It also allows for the transfer of an amount in excess of 20%, with the excess similarly subject to utilization requirements. Comparison: The core requirement is substantially identical in both provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t create the full reserve, it must create the reserve to the extent possible. Any shortfall is carried forward to the next tax year and deemed part of that year's requirement. Clause 232(4): Clarifies that, to the extent the shortfall is carried forward, the company is deemed to have created sufficient reserves for the first year. Clause 232(5): Provides that if the shortfall continues for two consecutive years, the deeming provision does not apply for the second year. Section 115VT(2): Contains nearly identical language and structure, with the same carry-forward and deeming provisions, and a similar two-year limitation. Comparison: The Bill closely tracks the Act, with minor changes in terminology ("tax year" vs. "previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant year. Clause 232(8): Provides for a reduction of the taxable amount by the proportionate tonnage income charged to tax in the year the reserve was created. Section 115VT(4): Contains the same three triggers for re-taxation, the same proportionality formula, and the same reduction for proportionate tonnage income. Comparison: The mechanisms are identical. The Bill clarifies the timing of taxation and maintains the same exceptions (e.g., demerger). Implications: These provisions serve as anti-abuse measures, deterring the diversion of reserves and ensuring the integrity of the tonnage tax regime. 6. Shortfall in Reserve Creation and Tax Consequences [Clause 232(9) vs. Section 115VT(5)] Clause 232(9): If the reserve credited is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include inland vessels. Comparison: The definition is harmonized across both provisions, ensuring clarity and consistency. Implications: This allows for the acquisition of second-hand foreign ships to qualify as "new," supporting fleet expansion from global markets. Practical Implications The practical impact of these provisions is significant for shipping companies: * Compliance Burden: Companies must maintain meticulous records of book profits, reserve creation, and utilization, with potential tax consequences for any missteps. * Investment Incentive: The regime incentivizes reinvestment in shipping assets, aligning tax benefits with national maritime policy goals. * Risk of Loss of Benefits: Persistent non-compliance leads t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . * Both provisions have been updated (through Finance Act, 2025 amendments) to include "new inland vessels" alongside ships, reflecting changes in the industry and policy priorities. No substantive changes in policy or operational requirements are introduced by Clause 232(1)-(11) compared to Section 115VT, ensuring continuity and predictability for industry stakeholders. Conclusion Clause 232(1)-(11) of the Income Tax Bill, 2025, represents a careful evolution of the existing Section 115VT framework, preserving its core objectives while introducing clarifications and updates to reflect the current legislative context. The provisions are designed to ensure that the tonnage tax regime remains both attractive and robust, balancing t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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