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TMI BlogAnti-Abuse Safeguards in the Indian Tonnage Tax Regime : Clause 234(1)-(3) of the Income Tax Bill, 2025 Vs. Section 115VZB of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... norms, is susceptible to potential abuse, particularly through arrangements engineered to secure undue tax benefits. To counteract such misuse, specific anti-abuse provisions have been embedded within the legislative framework. Clause 234 of the Income Tax Bill, 2025 , and its predecessor, Section 115VZB of the Income-tax Act, 1961, embody these anti-abuse safeguards. Both provisions aim to ensure that only genuine shipping operations benefit from the tonnage tax scheme, and that the scheme is not manipulated to secure tax advantages for non-eligible activities or entities. This commentary provides a comprehensive analysis of Clause 234(1)-(3), explores its legislative intent, dissects its operative mechanism, and critically compares it wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oundational rule that the tonnage tax scheme is inapplicable to companies engaging in abusive transactions or arrangements. The phrase "subject to the provisions of this Part" ensures that this exclusion operates within the broader regulatory framework governing tonnage tax. The operative trigger is the company being a "party to any transaction or arrangement" that constitutes an "abuse" of the scheme. This broad phrasing is significant, as it encompasses both direct and indirect participation in abusive conduct, and covers both single transactions and more complex arrangements. Clause 234(2): Defining 'Abuse' and Scope of Tax Advantage "For the purposes of sub-section (1), a transaction or arrangement shall be considered an abuse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income or increasing the loss, from activities other than tonnage tax activities chargeable to tax, computed on the basis of entries made in the books of account in respect of the tax year in which the transaction was entered into; or (b) a transaction or arrangement which produces to the tonnage tax company more than ordinary profits which might be expected to arise from tonnage tax activities." This sub-clause elucidates the concept of "tax advantage" through two principal limbs: * Expense and cost allocation (Clause 3(a)): This covers arrangements that manipulate the determination or apportionment of expenses or interest, with the effect of reducing taxable income (or increasing losses) from non-tonnage tax activities. The refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25 Bill uses "would but for this section have resulted," which is a slightly more explicit articulation of potential abuse. * Definition of Tax Advantage: Both provisions provide an inclusive definition, covering: * Manipulation of expense or interest allowances, cost allocation, or apportionment that affects non-tonnage tax income or loss. * Arrangements producing more than ordinary profits from tonnage tax activities. The 2025 Bill's language is marginally more detailed in specifying the computation "on the basis of entries made in the books of account in respect of the tax year," whereas the 1961 Act refers to "the previous year." Substantive and Procedural Differences While the core anti-abuse rules are retained, the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not alter the substantive reach or intent of the provision. Practical Implications For Shipping Companies * Companies must ensure that all transactions and arrangements are commercially justified and not designed primarily for tax advantage. * Internal controls and documentation must be robust to demonstrate the bona fide nature of transactions, particularly those involving related parties or significant cost allocations. * Companies must be vigilant in allocating expenses and recognizing profits, ensuring that non-tonnage tax activities are not used to shelter income or inflate losses. For Tax Authorities * The provisions empower tax officers to scrutinize arrangements and, where abuse is detected, deny the tonnage tax benefit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment" and the types of transactions likely to be scrutinized. * Procedural Safeguards: While the full Clause 234 includes procedural safeguards (notice, opportunity to be heard, approval of higher authority), ongoing monitoring of their effectiveness is warranted to ensure fairness. Conclusion Clause 234(1)-(3) of the Income Tax Bill, 2025, represents a direct continuation of the anti-abuse framework established by Section 115VZB of the Income-tax Act, 1961. Both provisions are designed to prevent the misuse of the tonnage tax regime by shipping companies through arrangements aimed at securing undue tax benefits. The provisions are broadly worded to capture a wide range of abusive practices, with the ultimate objective of preserving the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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