Qualifying Ship and Computation of Income Under the Tonnage Tax Scheme
The law governing tonnage tax for shipping companies has been reorganised under the Income-tax Act, 2025. This article explains the current provisions and also preserves the substance of former Sections 115VD and 115VE of the Income-tax Act, 1961 for reference.
Current Legal Framework Under the Income-tax Act, 2025
Section 225 provides the gateway for the special tax treatment of income from the business of operating qualifying ships. Subject to the statutory conditions, a company may opt to compute that income under the special provisions governing tonnage tax.
Section 226 contains the present framework of the tonnage tax scheme. It addresses when a company is regarded as operating a ship or inland vessel, requires a tonnage tax company to compute profits from qualifying ships under the scheme, treats tonnage tax business as separate from other business, and requires the relevant profits to be computed separately. The option for the scheme is governed by Section 231.
Section 225
Deals with income from the business of operating qualifying ships and the option to compute that income under the special tonnage tax provisions.
Section 226
Sets out the tonnage tax scheme, including separate treatment of tonnage tax business and the consequences where the scheme does not apply.
Section 227
Provides the mechanism for computation of tonnage income of each qualifying ship.
Section 231
Governs the method and timing for exercising the option for the tonnage tax scheme.
What Is a Qualifying Ship?
For the current tonnage tax provisions, the statutory definition treats a ship or inland vessel as a qualifying ship when the prescribed conditions are satisfied. In substance, the vessel must meet the minimum tonnage requirement, satisfy the applicable registration or licensing condition, and have a valid certificate indicating its net tonnage.
Core conditions
- It must be a seagoing ship, vessel or inland vessel of at least fifteen net tonnage.
- It must satisfy the applicable registration or licensing requirement. This includes ships registered under the Merchant Shipping Act, 1958, qualifying foreign-registered ships licensed by the Director-General of Shipping, and eligible inland vessels registered under the Inland Vessels Act, 2021.
- A valid certificate indicating the net tonnage must be in force.
Vessels excluded from the definition
The definition excludes specified categories, including vessels mainly used to provide goods or services ordinarily provided on land, fishing vessels, factory ships, pleasure crafts, harbour and river ferries, offshore installations, and a qualifying ship used as a fishing vessel for more than thirty days during a tax year.
The precise statutory conditions should be checked against the current Act and Rules for the relevant tax year, particularly where an inland vessel, foreign registration, charter arrangement or tonnage certificate is involved.
How Is Income Computed Under the Tonnage Tax Scheme?
Under Section 226, a tonnage tax company operating qualifying ships computes profits from that business under the tonnage tax scheme. The tonnage tax business is treated as a business separate from the company's other activities, and its profits are computed separately.
The scheme applies only where the statutory option has been exercised in accordance with Section 231. If a company operating qualifying ships is outside the scheme or has not exercised the required option, its profits from that business are computed under the other applicable provisions of the Income-tax Act, 2025.
Section 227 then provides the detailed computation of tonnage income. Broadly, tonnage income is determined ship by ship by reference to the qualifying ship's tonnage and the number of days for which it is operated as a qualifying ship during the tax year.
| Issue | Current position |
|---|---|
| Separate business | Tonnage tax business is treated separately from the company's other activities. |
| Separate computation | Profits of the tonnage tax business are computed separately from profits and gains of other business. |
| Option required | The special scheme applies only where the option is exercised as provided by Section 231. |
| Tonnage income | Section 227 contains the ship-wise computation mechanism based on tonnage and operating days. |
| No valid option | Profits are computed under the other applicable provisions of the Act. |
Former Section 115VD of the Income-tax Act, 1961 - Qualifying Ship
Former Section 115VD treated a ship as a qualifying ship where it was a seagoing ship or vessel of fifteen net tonnage or more, met the specified registration or licensing requirement, and had a valid certificate indicating its net tonnage.
The provision excluded specified categories such as vessels mainly used to provide goods or services ordinarily provided on land, fishing vessels, factory ships, pleasure crafts, harbour and river ferries, offshore installations and a qualifying ship used as a fishing vessel for more than thirty days during a previous year.
The Finance Act, 2025 extended the 1961 Act tonnage tax framework to eligible inland vessels with effect from 1 April 2026 before the corresponding subject matter was carried into the Income-tax Act, 2025.
Former Section 115VE of the Income-tax Act, 1961 - Manner of Computation
Former Section 115VE required a tonnage tax company engaged in operating qualifying ships to compute the profits of that business under the tonnage tax scheme. It treated the business of operating qualifying ships giving rise to relevant shipping income as a separate tonnage tax business, distinct from the company's other activities.
The provision also required those profits to be computed separately, made the scheme dependent on a valid option under former Section 115VP, and provided that where the company was not covered by the scheme or had not opted for it, its profits from the shipping business were to be computed under the other provisions of the 1961 Act.