Section 226 Tonnage tax scheme.

Income-tax Act, 2025

At a Glance

This document is the Old Version of Clause 226 of the Income Tax Bill, 2025, which sets out the tonnage tax scheme for shipping companies. It matters because it prescribes when a company is regarded as operating a ship for tonnage-tax purposes, and it prescribes separate computation rules and the requirement of an option u/s 231. Who is affected: companies operating qualifying ships (and, to the extent the text elsewhere indicates, potentially inland vessels). Effective date/decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 226 forms part of the Bill's Part dealing with "Special provisions relating to income of shipping companies" and interacts with sections 227, 228(1) and the option procedure in section 231. The clause defines the meaning of "operating a ship" for the Part, sets out that a tonnage tax company shall compute profits from qualifying shipping business under the tonnage tax scheme, treats the tonnage business as a separate business, requires separate computation of profits, makes the scheme available only if an option is exercised u/s 231, and clarifies tax treatment of tonnage income and relevant shipping income. Definitions/explanations: the clause provides that "operating a ship" includes operation of ships whether owned or chartered, and includes cases where even a part of the ship or inland vessel has been chartered in under arrangements such as slot charter, space charter or joint charter. Not stated in the document: any technical definition of "qualifying ship," "tonnage income" beyond cross-reference to sections 227 and 228, or precise procedural details for making the option u/s 231.

Statutory Provision Mode

Text & Scope

Coverage: Clause 226 applies to companies engaged in operating ships and establishes the availability and mechanics of the tonnage tax scheme for such activity. Ingredients/elements: (1) the clause sets out who is "regarded as operating a ship" - that is, operation of a ship whether owned or chartered and inclusion of partial charter arrangements (slot/space/joint charter). (2) If a company qualifies as a tonnage tax company engaged in operating qualifying ships, it must compute profits from that business under the tonnage tax scheme. (3) The tonnage tax business is a separate business distinct from other activities of the company. (4) Profits from the tonnage business are to be computed separately. (5) The scheme applies only where an option u/s 231 is made. (6) If a company is not covered by the scheme or has not made the option, profits from the shipping business shall be computed under the other provisions of the Act. (7) Subject to other provisions of the Part, the tonnage income is to be computed as per section 227 and "deemed to be the profits chargeable under the head 'Profits and gains of business or profession'", and the relevant shipping income referred to in section 228(1) shall not be chargeable to tax.

Interpretation

The clause signals a legislative intent to provide an elective, self-contained tax computation regime for qualifying shipping operations, distinct from general profit computation. The textual structure emphasises separability (distinct business, separate computation) and voluntariness (option u/s 231). The inclusion of charter-in arrangements (including partial charters such as slot or space charters) indicates a purposive effort to capture commercial shipping practices within the scheme's scope. Not stated in the document: explicit legislative policy rationale, rates, or formulae - these are to be found in cross-referenced sections.

Exceptions/Provisos

Carve-outs and conditions stated: companies that have not opted for the scheme u/s 231 or are not covered by the scheme must compute shipping profits under the general provisions of the Act. Not stated in the document: any qualifying tests for a "tonnage tax company," thresholds, disqualifying events, or transitional arrangements. Not stated in the document: duration or locking-in rules for the option (if any), penalties or anti-avoidance rules specific to the scheme.

Illustrations

• Example 1: A company operates a fleet of qualifying ocean-going ships and elects the tonnage scheme u/s 231. Its profits from the tonnage business will be computed u/s 227 and treated as profits chargeable under business/profession, with relevant shipping income u/s 228(1) not chargeable. Not stated in the document: the numeric computation method or rates.
• Example 2: A company carries on shipping operations but does not make the option u/s 231. Its shipping profits will be computed under the Act's general provisions (i.e., not under the tonnage scheme). Not stated in the document: whether the company may later opt in and any lock-in period.
• Example 3: A company charters in parts of vessels through slot or space charters and conducts operations. Those arrangements are explicitly included within the clause's ambit so that such income may fall within the tonnage tax computation if the company qualifies and opts in. Not stated in the document: whether partial charter arrangements produce pro rata tonnage computations or any allocation rule.

Interplay

The clause explicitly cross-references sections 227 (computation of tonnage income), 228(1) (relevant shipping income), and section 231 (option mechanism). The document does not set out the content of those sections; therefore interpretation of the tonnage scheme requires reading those cross-referenced provisions. Not stated in the document: interactions with other Parts of the Act, rules, notifications, or international tax provisions (e.g., treaty implications).

Differences between the two provisions and practical impact

• Express inclusion of inland vessels in clause (1)(a): Document 1 (Section 226, Income-tax Act, 2025) expressly reads "if it operates any ship or inland vessel, as the case may be, whether owned or chartered by it..."; Document 2 (Clause 226 of the Income Tax Bill, 2025 - Old Version) reads "if it operates any ship whether owned or chartered by it..." and only later refers to "the ship or inland vessel, as the case may be" in the inclusory phrase.
  • Practical impact: The Act's final text (Document 1) makes the statutory scope unmistakably inclusive of inland vessels at the primary predicate (i.e. the act of operating a ship/inland vessel). This reduces ambiguity and clarifies that companies operating inland vessels are within the tonnage scheme's ambit. Affected parties: operators of inland vessels, compliance advisors and tax authorities. Consequence: more immediate application to inland navigation operators and clearer eligibility/registration and computation obligations under the tonnage tax scheme.
• Minor drafting/formatting differences: Document 2 contains an additional explanatory sentence after the clause text ("Clause 226 of the Bill seeks to provide for tonnage tax scheme and defines that a company operating ships and giving the manner of computation of income under tonnage tax scheme for a tonnage tax company for its tonnage income.") which is an extrinsic note and not substantive law.
  • Practical impact: None on substantive tax liabilities; only aids reader comprehension in the Bill version.
• No other substantive differences are apparent in the operative subsections (2)-(7): both texts impose separate computation of tonnage profits, require an option u/s 231, and provide that relevant shipping income referred to in section 228(1) shall not be chargeable to tax where the tonnage scheme applies.
  • Practical impact: Continuity in the scheme's mechanics; operators and tax administrators can rely on the same core structure in both drafts.

Practical Implications

• Compliance and risk areas: companies operating ships must determine whether they qualify for the tonnage regime and whether to exercise the option u/s 231. Failure to correctly separate tonnage business profits from other business profits or to exercise the option when intended may result in incorrect tax treatment. Not stated in the document: penalties or specific compliance forms.
• Record-keeping/evidence points: the statutory requirement to treat the tonnage business as separate and to compute profits separately implies a need for clear accounting segregation of revenue, expenses and allocations relating to tonnage operations versus other business activities. Not stated in the document: precise documentary or books-and-records prescriptions.

Key Takeaways

• Clause 226 establishes an elective tonnage tax regime for companies operating qualifying ships that requires separate business treatment and separate computation of tonnage profits.
• The scheme applies only if an option is made u/s 231; absent the option, general provisions govern computation.
• The clause expressly includes chartered ships and partial charter arrangements (e.g., slot/space/joint charters) within "operating a ship."
• Tonnage income is to be computed u/s 227 and is deemed to be profits chargeable under "Profits and gains of business or profession."
• Relevant shipping income referred to in section 228(1) is not chargeable to tax where the tonnage scheme applies.
• The clause requires clear accounting segregation of tonnage business, implying attendant compliance and record-keeping responsibilities.
• Not stated in the document: precise rates, formulae, qualifying criteria for "qualifying ships," procedural details of the option, lock-in periods, or penalty provisions.

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Full Text:

Section 226 Tonnage tax scheme.

Tonnage tax scheme requires separate business treatment and distinct computation for qualifying shipping operations upon exercise of option. An elective tonnage tax scheme treats qualifying shipping operations as a separate business requiring separate computation of profits; operation includes owned, chartered and partial charter arrangements. Tonnage income is computed under the Part's computation provision and deemed to be profits of business, with relevant shipping income not chargeable where the scheme applies. The regime is available only if the company exercises the statutory option; absent the option, general provisions apply.