Tonnage tax scheme.

226(1)

In this Part, a company shall—

• (a) be regarded as operating a ship or inland vessel, as the case may be, if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship or inland vessel, as the case may be, has been chartered in by it in an arrangement such as slot charter, space charter or joint charter; and
• (b) not be regarded as operating a ship or inland vessel, as the case may be, which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.

226(2)

A tonnage tax company engaged in the business of operating qualifying ships shall compute the profits from such business under the tonnage tax scheme.

226(3)

The tonnage tax business shall be considered as a separate business distinct from all other activities or business carried on by the company.

226(4)

The profits referred to in sub-section (2) shall be computed separately from the profits and gains from any other business.

226(5)

The tonnage tax scheme shall apply only if an option to that effect is made as per section 231.

226(6)

Where a company engaged in the business of operating qualifying ships,––

• (a) is not covered under the tonnage tax scheme; or
• (b) has not made an option in respect of the tonnage tax scheme as per section 231, the profits and gains of such company from such business shall be computed as per other provisions of this Act.

226(7)

Subject to the other provisions of this Part,––

• (a) the tonnage income, shall be–– (i) computed as per section 227; and (ii) deemed to be the profits chargeable under the head “Profits and gains of business or profession”; and
• (b) the relevant shipping income referred to in section 228(1) shall not be chargeable to tax.

Explanation

Section Summary:

The tonnage tax scheme is a special tax regime designed for shipping companies operating qualifying ships. It allows such companies to compute their taxable profits based on the tonnage (size) of their ships rather than their actual profits. This section outlines the conditions under which a company is considered to be operating a ship, the computation of profits under the tonnage tax scheme, and the separation of tonnage tax business from other business activities.

Key Changes:

1. Clarification of Operating Ships: The section clarifies that a company is considered to be operating a ship even if it charters in part of a ship (e.g., slot charter, space charter, or joint charter). However, ships chartered out on bareboat terms for more than three years are excluded.
2. Separate Business Treatment: The tonnage tax business is treated as a distinct business separate from other activities of the company.
3. Optional Scheme: The tonnage tax scheme applies only if the company opts for it under Section 231.
4. Exclusion of Relevant Shipping Income: Relevant shipping income (as defined in Section 228(1)) is not chargeable to tax under this scheme.

Practical Implications:

1. Shipping Companies: Companies operating qualifying ships can benefit from a simplified tax computation method based on tonnage, which may result in lower tax liabilities compared to the regular tax regime.
2. Separate Accounting: Companies must maintain separate accounts for their tonnage tax business and other business activities.
3. Opt-In Requirement: Companies must actively opt into the tonnage tax scheme to avail of its benefits. Failure to opt in means profits will be computed under the regular tax provisions.
4. Exclusion of Bareboat Charters: Ships chartered out on bareboat terms for more than three years are not eligible for the tonnage tax scheme.

Critical Concepts:

1. Tonnage Income: Profits are computed based on the tonnage of the ship rather than actual profits. The calculation method is detailed in Section 227.
2. Qualifying Ships: Ships that meet specific criteria (e.g., used for transportation, not for leisure) are eligible for the tonnage tax scheme.
3. Relevant Shipping Income: Income derived from qualifying ships, which is exempt from tax under this scheme.
4. Bareboat Charter: A leasing arrangement where the charterer takes full control of the ship, including crew and operations, for a specified period.

Compliance Steps:

1. Opt-In: Companies must formally opt into the tonnage tax scheme under Section 231.
2. Separate Accounting: Maintain separate books of accounts for tonnage tax business and other business activities.
3. Tonnage Income Calculation: Compute tonnage income as per Section 227 and report it separately.
4. Exclusion of Bareboat Charters: Ensure that ships chartered out on bareboat terms for more than three years are excluded from the tonnage tax scheme.

Examples:

1. Scenario 1: A shipping company owns five qualifying ships and charters in part of another ship under a slot charter arrangement. The company opts into the tonnage tax scheme. Its taxable profits will be computed based on the tonnage of all six ships, and the income from these ships will not be taxed under regular provisions.
2. Scenario 2: A company charters out one of its ships on bareboat terms for five years. This ship is not eligible for the tonnage tax scheme, and its income will be taxed under regular tax provisions.

This section simplifies tax compliance for shipping companies while ensuring clarity on eligibility and computation methods.