TaxTMI 
TaxTMI 
Continuity of Tonnage Tax Benefits in Shipping Sector Demergers : Clause 233(5)-(6) of Income Tax Bill, 2025 Vs. Section 115VZ of Income-tax Act, 1961
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.... the Income-tax Act, 1961, both address the treatment of the tonnage tax scheme in the context of demergers, ensuring clarity and certainty for stakeholders involved in such transactions. This commentary provides a detailed analysis of the statutory provisions, their objectives, practical implications, and a comparative evaluation to highlight both the continuity and evolution in legislative approach. Objective and Purpose The legislative intent behind both Clause 233(5)-(6) of the Income Tax Bill, 2025, and Section 115VZ of the Income-tax Act, 1961, is to facilitate seamless corporate restructuring in the shipping sector without disrupting the application of the tonnage tax scheme. The tonnage tax regime is designed to offer a simplified....
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....This provision addresses the scenario where a shipping company (the demerged company) opts for a demerger and transfers its business to another entity (the resulting company) while its option for the tonnage tax scheme is still in force. The key elements are: * Timing: The transfer must occur before the expiry of the tonnage tax scheme option, ensuring that the benefit is not extended beyond the originally intended period. * Conditionality: The resulting company must be a "qualifying company" as per the definition in the tonnage tax regime, typically requiring it to operate qualifying ships and meet prescribed conditions. * Continuity: The tonnage tax scheme applies to the resulting company for the "unexpired period," i.e., the remain....
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....erse tax consequences. 3. Section 115VZ of Income-tax Act, 1961 Text: "Where in a scheme of demerger, the demerged company transfers its business to the resulting company before the expiry of the option for tonnage tax scheme, then, subject to the other provisions of this Chapter, the tonnage tax scheme shall, as far as may be, apply to the resulting company for the unexpired period if it is a qualifying company: Provided that the option for tonnage tax scheme in respect of the demerged company shall remain in force for the unexpired period of the tonnage tax scheme if it continues to be a qualifying company." Section 115VZ is substantially similar to Clause 233(5)-(6), providing for the application of the tonnage tax scheme to the resu....
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....ity to retain the tonnage tax benefit during restructuring enhances financial planning and operational flexibility. It encourages consolidation and business realignment without the fear of losing a critical tax incentive. * Tax Authorities: The requirement for qualifying status and subjecting the benefit to other provisions ensures that only genuine restructurings benefit, preserving the integrity of the tax base. * Advisors and Auditors: Need to ensure due diligence in structuring transactions, maintaining qualifying status, and complying with procedural requirements to avoid disallowance or disputes. * Investors and Lenders: Greater certainty regarding the tax profile of restructured entities aids in risk assessment and credit evalu....
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....lowing for more streamlined integration with other corporate tax provisions. No material change in substantive rights or obligations is introduced; rather, the 2025 Bill appears to reinforce and clarify existing law, with improved legislative drafting and alignment with the new tax code's structure. Comparative Analysis with Other Jurisdictions The Indian approach to tonnage tax in restructuring scenarios is broadly consistent with international best practices. In jurisdictions such as the United Kingdom, Singapore, and the Netherlands, the tonnage tax regime also provides for continuity during mergers and demergers, subject to qualifying conditions and regulatory approvals. The focus is on: * Ensuring that legitimate business reor....