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P. Manoj

Indian shipping is about to enter the long-awaited tonnage tax regime, which will help it to compete on a global platform, where close to 90 per cent of the tonnage operate on a very low level of tax. — K. Pichumani

AFTER almost five years of waiting ever since the demand was first made, the Indian shipping industry is on the verge of realising its dream of securing a new regime of taxation based on the tonnage of ships owned.

The tonnage tax legislation is envisaged as part of the Income Tax Act, 1961 and a new section along with a new schedule is proposed. The schedule is based on the corresponding British legislation, which is also a schedule to the relevant Finance Act.

However, in the proposed Indian Bill, scripted by a six-member panel constituted by the Finance Ministry, certain deviations from the UK Act have been incorporated to suit the Indian shipping conditions. Besides, some clauses of the UK Act have been "Indianised" to align with the Indian taxation system.

As per the deviations/Indianisations, the concept of "group", as appearing in the UK tonnage tax regime, has been omitted from the Indian draft legislation as India does not have a concept of consolidating the income of a group for tax purposes.

The definition of "qualifying ships" under the UK legislation is narrower compared to that under the Indian draft. For instance, dredgers are proposed to be included in the Indian draft legislation, which is not so under the UK law.

The "qualifying income" under the UK regime is divided among core, secondary and incidental activities. However, in the Indian draft, the activities have been re-grouped and simplified. The UK Act has a concept of training as one of the conditions for falling and continuing within the tonnage tax regime. This concept has been incorporated only in a limited extent in the Indian context due to the situations prevalent in India.

But the concept of the requirement to create a separate reserve made up of a minimum of 20 per cent of the book profits computed as per the Companies Act and the utilisation of the reserve for building up shipping capacity has been incorporated in the Indian draft legislation, a concept absent in the UK legislation.

The Indian draft law has an idea of block of assets whereby the concept of an individual asset is not relevant in respect of depreciable assets.

Accordingly, the concept of splitting up the block of ships into qualifying and non-qualifying has been incorporated in the draft for the purpose of allowing depreciation under the normal tax regime for that segment of the activity that does not fall under the tonnage tax regime and for computing notional depreciation for that segment which falls under the tonnage tax regime.

The concept of capital gains, which under the UK legislation exists in the `normal' form and is exempt under it to the extent of the period of use attributable to the tonnage tax regime, has been treated in the Indian context. The Indian draft envisages taxability of the sale price exceeding the written down value of the relevant block of qualifying ships.

Certain restrictions have been put in relation to the concept of "chartered in" vessels. While the limit under the Indian draft in this regard has been brought down to 49 per cent, against 75 per cent in the case of the UK, the chartering under the bare-boat-charter-cum-demise (BBCD) method has been treated as owned vessels.

A finance lease is treated in a different manner under the UK legislation compared to a normal finance lease. There are certain restrictions on allowability of capital allowances (depreciation) thereunder. No such distinction is sought to be made under the Indian legislation.

The shipping companies will be given a window period of one year to opt for the new tonnage tax scheme or remain under the normal corporate tax structure after the draft legislation is passed by Parliament.

The Rakesh Mohan Committee on tonnage tax had recommended a window of two years for shipping companies to opt for the new tax scheme after the draft legislation is enacted by Parliament. But the Central Board of Direct Taxes (CBDT) has cut down the window to one year.

On the main crux of tonnage tax, that is the mode of levy, India has followed the UK model by converting the shipping tonnage into a notional profit and collecting a tonnage tax thereon. The method of calculation of tonnage tax will be based on a notional income schedule per day per net registered tonnes (NRT) of the ship worked out by the CBDT at the time of enactment of the Bill.

The income of each qualifying ship for the previous year will be computed by multiplying the daily income by the number of days in the previous year or if the ship was operated by the company for only part of the previous year, the number of days in that part of the previous year.

The aggregate of the income of all the qualifying ships operated by the company thus worked out will be the company's tonnage tax income for that previous year on which the prevailing corporate tax rates will be applied to arrive at the tonnage tax levy.

The draft Bill also proposes a minimum lock-in period of 10 years once a shipping company opts for the new tonnage tax. A tonnage tax regime will help Indian shipping companies to compete on a global platform, where close to 90 per cent of the tonnage operate on a very low level of tax when compared with the high incidence of corporate tax prevailing in India.

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