Since April1, 2005, shipping companies in India are being assessed to income-tax under a tonnage tax scheme (instead of normal way of taxation in other cases).

A company owning at least one qualifying ship with a minimum of 15 tonnes capacity having a valid certificate from the competent authority could opt for the scheme. The salient features of the scheme are:

Certain types of ships like fishing vessels, pleasure crafts, harbour and river ferries, etc., are excluded in terms of Section 115VD which gives details of what ships qualify for the scheme.

The business of operating qualifying ships is to be considered a separate business and separate accounts are to be maintained. Section 115VG gives the manner of computation of the daily tonnage income.

The daily tonnage income shall be multiplied by the number of days the ship operated. The resulting amount would be the annual tonnage income from the ship.

A company owning at least one ship may charter in ships subject to certain limits for the purpose of operation. Relevant shipping income, which replaces the actual income from the operations, is defined in Section 115VI to mean income from core activities and incidental activities to a limited extent. Section 115VJ mentions about the treatment of common costs.

It is a scheme of presumptive taxation whereby income is determined based on the tonnage of the ship.

The income so determined is taxed at the normal corporate rate applicable for the year.

Tax is payable even if there is a loss in a year.

The scheme is optional. However, once such option is exercised, there is lock-in-period of 10 years.

Since this is a preferential regime of taxation, certain conditions like creation of reserves, training, etc. are required to be met.

A company can be expelled in certain circumstances from the scheme.

Adjustments to income

Section 115VA provides that provisions of Sections 28 to 43C cannot override computation of profits and gains of a shipping business.

Hence, when the income of a shipping undertaking has been computed on the basis of Section 115VA, no further additions or subtractions can be made from the same for assessment of income tax.

For the assessment year 2007-08, the AO made additions under Section 41(1) in respect of write back of sundry creditors, prior period adjustments, etc. by observing that those amounts did not relate to core shipping activity. The CIT (Appeals) agreed with the Assessing Officer.

The Income tax Appellate Tribunal deleted it saying that the Legislature in its wisdom provided the manner of computation of income under the tonnage tax scheme on the ground that Sections 28 to 43C would not override the computation of profits and gains under Section 115VA.

As Section 41(1) falls within Sections 28 to 43C, no separate addition under that section can be made. With the introduction of Chapter XII-G, the entire methodology of taxing income from the business of operating qualifying ships has changed and recourse to the normal provisions of the Act in peace-meal manner is not authorised by law.

Huge tax savings

From the above, it can be noticed that through tonnage system of taxation, shipping undertakings are having enormous tax savings.

In the case of SCI (supra), the profits in the P&L account for the year were Rs 800 crore, but only Rs 18 crore was offered for taxation under the tonnage tax scheme.

Prima facie , the scheme leads to substantial unassessments and needs a re-look. At least, rates of daily tonnage income can be revised.

(The author is a former chairman of CBDT.)

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