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P. Manoj

New Delhi , Oct. 23

A SIX-MEMBER committee set up by the Finance Ministry has finalised a draft Bill on implementing a new tonnage-based tax regime for the domestic shipping industry as an alternative to the normal corporate tax structure.

The tonnage tax legislation is envisaged to be a part of the Income-Tax Act, 1961 through the addition of a new section in the Act.

The draft Bill contains provisions on qualifying companies, qualifying shipping activities, qualifying income, eligibility criteria for ships, rules of entry and exit and accounting standards to give effect to the tonnage tax scheme.

The committee has opted for converting the shipping tonnage into a notional profit and the levy of a tonnage tax thereon by applying the prevailing corporate tax rates. "New notional profit rates will be worked out by the Central Board of Direct Taxes based on the exchange rate at the time of enactment of the Bill," Shipping Ministry officials told Business Line.

Earlier, the Rakesh Mohan committee on tonnage tax had in 2002 recommended a notional income schedule of Rs 40 per day for each 100 tonnes up to 1,000 tonnes, Rs 30 per day for each 100 tonnes from 1,001 tonnes to 10,000 tonnes, Rs 25 per day for each 100 tonnes from 10,001 tonnes to 25,000 tonnes and Rs 15 per day for each 100 tonnes above 25,000 tonnes. The rates were worked out on the then prevailing exchange rates.

The domestic ship owners prefer the notional profit rate fixed by the CBDT to remain constant for a period of 10 years which is the minimum lock-in period prescribed by the draft Bill for a shipping company once it opts to be taxed under the tonnage tax scheme.

"There should not be any indexation or annual increase in the notional profit rate fixed by the CBDT as this would enable the owners to know their exact tonnage tax liability for the next 10 years. But, the applicable corporate tax rates may vary as it is the prerogative of the Finance Ministry to fix those rates annually," the Chairman of a top line shipping company told Business Line.

The daily income for each qualifying ship will be determined by the notional income schedule. On this basis, the income of each ship for the previous year will be computed by multiplying this with the number of days it has operated that year. Finally, the aggregate of the income of all the qualifying ships of a company will be its tonnage tax income for that previous year on which the prevailing corporate tax rate will be applied.

Qualifying ships would also include dredgers. It has also imposed certain restrictions in the case of "chartered in" vessels, while ships chartered under the bare-boat-charter-cum-demise (BBCD) method has been treated as own vessel.

It incorporates the concept of creating a separate reserve account (most likely with a minimum of 20 per cent of the annual book profits computed as per the Companies Act) to be utilised for the sole purpose of acquiring ships within a period of 8 years.

The draft Bill also provides for the treatment of the concept of capital gains whereby the sale price exceeding the written down value of the relevant block of qualifying ships will be taxed.

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