In India, the Income Tax Act provides various taxation schemes to ease the compliance burden on specific industries. One such scheme, specifically tailored for qualifying shipping companies, is the tonnage tax scheme. This scheme offers a simplified method of taxation based on the tonnage (or capacity) of a company’s ships rather than its profits. Section 115VP of the Income Tax Act lays out the method and time for opting into this scheme.
In this blog, we’ll dive deep into Section 115VP, explaining how qualifying companies can opt for the tonnage tax scheme, the timelines involved, and the procedure that needs to be followed.
What is Section 115VP?
Section 115VP governs the procedure for a qualifying company to apply for and opt into the tonnage tax scheme. This scheme is a beneficial tax system that shipping companies can adopt to calculate their tax liability based on the tonnage of their ships rather than the traditional profit-based calculation.
Who Can Opt for the Tonnage Tax Scheme?
Before jumping into the process, it’s crucial to understand the concept of a “qualifying company”. A qualifying company refers to a shipping company that meets specific eligibility criteria under the provisions of the Income Tax Act. To opt for the tonnage tax scheme, the company must fulfill these requirements.
How to Opt for the Tonnage Tax Scheme?
To opt for the tonnage tax scheme under Section 115VP, a qualifying company must submit an application to the Joint Commissioner having jurisdiction over the company.
Key Points:
- The application must be made in the prescribed form and manner.
- The Joint Commissioner may request additional documents or information to confirm the company’s eligibility for the tonnage tax scheme.
Timeline for Application
The timeline for opting into the tonnage tax scheme depends on when the company was incorporated or became a qualifying company.
For Existing Qualifying Companies:
Companies that existed before the initial period (defined as the period after September 30, 2004, but before January 1, 2005) could apply for the tonnage tax scheme during this time.
For Companies Incorporated After the Initial Period:
- If the company was incorporated after the initial period, or it became a qualifying company after the initial period, the application must be made within three months of the date of incorporation or the date it became a qualifying company.
For Units in International Financial Services Centres (IFSC):
- Companies or units in an International Financial Services Centre (IFSC), which have availed deductions under Section 80LA, can apply for the tonnage tax scheme within three months from the date on which their Section 80LA deduction ceases.
Approval Process by the Joint Commissioner
Once the application is submitted, the Joint Commissioner will review the eligibility of the company to opt for the tonnage tax scheme. Here’s a step-by-step outline of the process:
- Request for Additional Documents: The Joint Commissioner may ask the company to furnish additional information or documents to verify its eligibility for the tonnage tax scheme.
- Approval or Rejection:
- If the Joint Commissioner is satisfied with the company’s eligibility, they will approve the application by passing a written order.
- If the Joint Commissioner is not satisfied, they will refuse the application and issue a written order specifying the reasons for rejection.
- Timely Disposal of Application: The Joint Commissioner must pass the order approving or rejecting the tonnage tax scheme within one month from the end of the month in which the application was received.
Effect of Approval
Once the company’s application for the tonnage tax scheme is approved, the provisions of the scheme will apply from the assessment year relevant to the previous year in which the company made the application.
International Financial Services Centre (IFSC) – A Special Mention
For companies located in an International Financial Services Centre (IFSC), Section 115VP makes specific provisions regarding their eligibility for the tonnage tax scheme. If such a company has previously availed tax deductions under Section 80LA, it can apply for the tonnage tax scheme within three months of the cessation of these deductions.
Note: The term “International Financial Services Centre” (IFSC) is defined under the Special Economic Zones Act, 2005.
Key Takeaways
- The tonnage tax scheme is an alternative and simplified tax regime for shipping companies, allowing them to pay taxes based on the tonnage of their ships.
- Section 115VP of the Income Tax Act provides the method and time of opting for this scheme.
- Companies must file their application with the Joint Commissioner within the specified timelines, based on their date of incorporation or the date on which they became a qualifying company.
- The approval process includes scrutiny by the Joint Commissioner, who will either approve or reject the application based on the company’s eligibility.
FAQs:
1. What is a qualifying company under the tonnage tax scheme?
A qualifying company is a shipping company that meets the eligibility criteria specified in the Income Tax Act and operates qualifying ships.
2. When can an existing company apply for the tonnage tax scheme?
An existing qualifying company could apply after September 30, 2004, but before January 1, 2005.
3. Can a new company apply for the tonnage tax scheme?
Yes, new companies incorporated after the initial period can apply for the tonnage tax scheme within three months of incorporation.
4. What happens if the Joint Commissioner rejects the application?
If the application is rejected, the company will be given an opportunity to be heard before a final decision is made.
5. How does the tonnage tax scheme benefit shipping companies?
The tonnage tax scheme allows companies to calculate their tax liability based on the tonnage of their ships, which can simplify tax calculations and reduce the overall tax burden.
Conclusion
For qualifying shipping companies, opting for the tonnage tax scheme under Section 115VP can be a beneficial way to manage their tax liabilities. By simplifying taxation to a tonnage-based model, this scheme offers ease and predictability in tax compliance. However, it’s crucial to ensure that the application is made within the stipulated time frame and that all necessary documents are submitted to the Joint Commissioner for approval.
Shipping companies that qualify or expect to qualify for the tonnage tax scheme should thoroughly understand the requirements and provisions of Section 115VP to make the most of this advantageous tax regime.
For more detailed guidance on tax-related matters, feel free to visit our website at www.smarttaxsaver.com
