Understanding Section 115VQ of the Income Tax Act: Period for Which Tonnage Tax Option Remains in Force

In India, the shipping industry can benefit from a specialized taxation scheme known as the Tonnage Tax Scheme. This scheme allows shipping companies to be taxed based on the tonnage of their ships rather than their actual income. Section 115VQ of the Income Tax Act governs the duration for which the tonnage tax option remains in force once a company opts for it.

In this comprehensive guide, we will explore the key provisions of Section 115VQ, the conditions under which the tonnage tax scheme can cease, and how companies can navigate this taxation benefit.

What is Section 115VQ?

Section 115VQ specifically deals with the period for which the tonnage tax option remains in force once a shipping company has chosen this option. The tonnage tax scheme provides an alternative tax system for companies in the shipping business, allowing them to pay tax based on the tonnage of ships they operate, rather than their profits. This section ensures that companies retain this tax benefit for a specific period and outlines when it may cease to apply.

Key Features of Section 115VQ

1. Validity Period of Tonnage Tax Option (Sub-section 1)

Once a company opts for the tonnage tax scheme and its application is approved under sub-section (3) of Section 115VP, this option will remain valid for ten years. This period is calculated from the assessment year relevant to the previous year in which the tonnage tax option was exercised.

For instance, if a qualifying shipping company exercised the tonnage tax option during the financial year 2023-24, the ten-year period would begin from the assessment year 2024-25.

2. Events That Can Terminate the Tonnage Tax Option (Sub-section 2)

Although the tonnage tax option remains valid for ten years, certain events can cause this option to cease before the ten-year period ends. These events include:

• (a) Loss of Qualifying Company Status: The tonnage tax option will cease to apply if the company no longer meets the definition of a qualifying company under the tonnage tax scheme.
• (b) Non-compliance with Specific Provisions: If a company fails to comply with certain key provisions, namely:
  • Section 115VT: Minimum Training Requirement for Seafarers.
  • Section 115VU: Maintenance of Accounts and Other Documents.
  • Section 115VV: Audit of Accounts of a Tonnage Tax Company.
• (c) Exclusion Under Section 115VZC: The company is excluded from the tonnage tax scheme as per Section 115VZC, which deals with fraudulent claims or activities leading to exclusion from the scheme.
• (d) Declaration of Non-Applicability: If the qualifying company voluntarily furnishes a written declaration to the Assessing Officer that it no longer wishes to be governed by the tonnage tax scheme, its profits and gains from operating qualifying ships will then be computed under the regular provisions of the Income Tax Act.

Why Opt for the Tonnage Tax Scheme?

The tonnage tax scheme offers several benefits to shipping companies:

• Predictable Taxation: Instead of being taxed on profits, companies pay tax based on the tonnage of their vessels, which provides certainty and stability in tax planning.
• Simplicity: The scheme reduces the administrative burden as companies don’t need to calculate their taxes based on fluctuating profits.
• Compliance Benefits: By meeting the tonnage tax requirements, companies can focus on the core shipping business while benefiting from a straightforward tax calculation.

FAQs

Q1: What happens if a company loses its qualifying company status? If a company ceases to be a qualifying company, the tonnage tax option will no longer apply, and the company must compute its tax liabilities under the normal provisions of the Income Tax Act.

Q2: Can a company re-enter the tonnage tax scheme after opting out? Once a company furnishes a declaration to opt out of the tonnage tax scheme, it may not re-enter the scheme for the remainder of the ten-year period. It would need to reapply if it wishes to re-enter the scheme in the future.

Q3: What are the consequences of non-compliance with the provisions under Section 115VT, 115VU, or 115VV? Non-compliance with these provisions results in the termination of the tonnage tax option. The company would then be required to follow regular tax provisions for calculating its profits and gains.

Conclusion

Section 115VQ of the Income Tax Act provides clear guidelines on the duration for which the tonnage tax option remains valid for shipping companies in India. By opting for this scheme, companies can benefit from predictable and simplified taxation based on the tonnage of their ships. However, businesses need to ensure continued compliance with the conditions laid out in the Act to maintain their status under the scheme.

For those in the shipping industry, understanding the nuances of the tonnage tax scheme is crucial to maximizing the available tax benefits. If you are unsure about your eligibility or compliance requirements, consulting with a tax expert or chartered accountant can help ensure that your company remains within the framework of the tonnage tax scheme.

To learn more about the tonnage tax scheme and other tax provisions, explore our detailed guides on www.smarttaxsaver.com.