The Hindu Business Line : Govt clarifies on `tax treatment' for ship sale

SHIPPING companies selling ships that were acquired through funds built up with benefits accorded under Section 33 AC of the Income-Tax Act will have to pay tax on the sale proceeds only on the amount utilised from the reserve account for buying such ships and not on borrowed funds, the Government has clarified.

"The real intent is to restrict the incidence of the tax on the amount utilised from the reserve account for acquiring the ship. The proposed amendment to the Act seeks to clarify this real intent whereby only so much of the sale proceeds which represent the amount credited to the reserve account and utilised for acquisition of the ship would be deemed to be the profits and taxed," the Finance Bill, 2005 has said.

This amendment will take retrospective effect from April 1, 2004 and will accordingly apply in relation to the assessment year 2004-05 and subsequent years.

Under Section 33 AC, shipping companies could transfer an amount equivalent to twice the aggregate of the paid-up share capital, the general reserves and the share premium account to a separate reserve account without paying any tax if the fund so set aside was used exclusively for new ship acquisitions.

The acquisition of a new ship is generally financed by debt and internal accruals. These internal accruals could be from general reserves or special reserves created for the purpose.

Further, the law provides that if a shipping company sells or transfers the ship after the three-year lock-in period and the sale proceeds are not utilised for the purpose of acquiring a new ship within a period of one year, such sale proceeds are deemed to be profits of the assessment year and taxed.

"A new ship is acquired by a shipping company by utilising both reserves and borrowed capital. The existing law provides that if a ship is sold or transferred, the whole of the sale proceeds would be subject to tax. This implies that both borrowed capital and the amount withdrawn from the reserve account would bear the burden of tax," the Finance Bill said.

"The clarification on Section 33 AC provides relief on tax treatment of reserves actually utilised for acquisition of ships," says Mr A.R. Ramakrishnan, Chief Operating Officer, Essar Shipping Ltd.

In late 2004, Essar Shipping had sold five Suezmax vessels to the Greek operator Top Tankers Inc., which fetched close to Rs 1,100 crore. Essar will have to buy new ships with the sale proceeds if it is to save on tax.

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