The Tonnage Tax Scheme is a special taxation regime introduced under Chapter XII-G (Sections 115V to 115VZC) of the Income Tax Act, 1961, to provide a simplified and globally competitive tax framework for Indian shipping companies. Instead of taxing actual profits, this scheme calculates tax based on the net tonnage of ships operated by the company, ensuring a stable and predictable tax liability.
1. Introduction & Rationale
The scheme was introduced by the Finance (No. 2) Act, 2004, following recommendations from the Rakesh Mohan Committee (2002) to enhance the competitiveness of Indian shipping companies against global players. Key objectives include:
- Providing a low and predictable tax burden.
- Encouraging fleet expansionand modernization.
- Simplifying tax compliance by replacing complex profit calculations with a tonnage-based formula.
2. Eligibility Criteria
(A) Qualifying Company (Section 115VC)
A company must satisfy the following conditions:
- Indian Company: Must be incorporated in India.
- Place of Effective Management (POEM) in India: Key management decisions must be made in India .
- Owns at Least One Qualifying Ship: Must have ownership of a ship meeting the prescribed criteria .
- Main Business is Operating Ships: Primary activity must be shipping operations, not ancillary services .
(B) Qualifying Ship (Section 115VD)
A ship qualifies if:
- It is a sea-going vesselwith a net tonnage ≥ 15.
- Registered under the Merchant Shipping Act, 1958, or licensed by the Director-General of Shipping.
- Has a valid tonnage certificate.
Exclusions:
- Fishing vessels, factory ships, pleasure crafts, harbor ferries, offshore installations, and ships primarily used for land-based services (e.g., floating hotels) .
3. Computation of Tonnage Income (Section 115VG)
The taxable income is calculated based on the daily tonnage income multiplied by the number of operational days in a year .
Daily Tonnage Income Slabs :
| NET TONNAGE RANGE | DAILY INCOME PER 100 TONS |
| Up to 1,000 tons | ₹70 |
| 1,001–10,000 tons | ₹700 + ₹53 per 100 tons above 1,000 |
| 10,001–25,000 tons | ₹5,470 + ₹42 per 100 tons above 10,000 |
| Above 25,000 tons | ₹11,770 + ₹29 per 100 tons above 25,000 |
Example:
For a ship with 12,000 tons:
- First 10,000 tons → ₹5,470
- Next 2,000 tons → ₹42 × 20 = ₹840
- Total Daily Income= ₹5,470 + ₹840 = ₹6,310
If operated for 365 days, the annual tonnage income = ₹6,310 × 365 = ₹23,03,150.
4. Key Features of the Scheme
(A) Optional & Lock-in Period (Section 115VQ)
- A company must opt-inby filing Form 65 within 3 months of incorporation or becoming eligible .
- Once opted, the scheme applies for 10 years.
- Early exitis allowed only under specific conditions (e.g., cessation of qualifying status) .
(B) Separate Business Treatment (Section 115VE)
- Shipping income is treated as a separate business, distinct from other operations .
- No deductions(e.g., under Chapter VI-A) are allowed on tonnage income .
(C) Transfer to Tonnage Reserve (Section 115VT)
- At least 20% of book profitsmust be transferred to a Tonnage Tax Reserve Account.
- Funds must be used within 8 yearsfor acquiring new ships or business expansion .
(D) Training Requirements (Section 115VU)
- Companies must comply with minimum training standardsset by the Director-General of Shipping .
- Non-compliance for 5 consecutive yearsleads to expulsion from the scheme .
5. Anti-Abuse Provisions (Sections 115VZB & 115VZC)
- Tax Avoidance (Section 115VZB):
- The scheme does not apply if a company enters into transactions solely for tax advantage.
- Exclusion from Scheme (Section 115VZC):
- If found abusing the scheme, the Assessing Officercan exclude the company after giving a show-cause notice .
6. Recent Amendments (Finance Bill, 2025)
The Inland Vessels Act, 2021 has been incorporated, extending the scheme to inland water transport . Key changes:
- Definition of “qualifying ship”now includes inland vessels registered under the new Act.
- Effective from AY 2026-27.
7. Advantages & Disadvantages
Pros:
✔ Lower tax liability compared to normal profit-based taxation.
✔ Predictable tax burden, aiding financial planning.
✔ Encourages fleet modernization .
Cons:
✖ No deductions (e.g., depreciation, Chapter VI-A benefits) .
✖ Strict compliance (training, reserve transfers) .
Conclusion
The Tonnage Tax Scheme offers a stable and competitive tax regime for Indian shipping companies, aligning with global practices. With the 2025 amendments, it now also supports inland water transport, further boosting India’s maritime sector. Companies must carefully assess eligibility and compliance requirements before opting in.
