TonnageTaxation Manish Agarwal

7/29/2019 TonnageTaxation Manish Agarwal

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PROJECT REPORT ON

TONNAGE

TAXATION

MADE BY-NAMEMANISH AGARWALROLL NUMBER602ROOM NUMBER-32


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INDEX

TOPIC PAGE NO.

1. Introduction 32. Basic Features 43. Shipping Industry demanded Tonnage

Tax System5

4.Tonnage Tax Scheme 65. Benefits 76.More on Tonnage Tax 87. Reference 10


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INTRODUCTION

Tonnage means the size or carrying capacity of a ship measured in tons.

In another words shipping considered in terms of total carryingcapacity. The tax on tonnage was introduced by the Mr. Jaswant sinhain 2003 2004 in the interim budget.

With the introduction of the tonnage tax, the Government not only meta long-standing demand of the shipping industry, but also created anatmosphere that enables Indian lines to compete successfully againsttheir rivals anywhere in the world. In other words, it was introduced tomake the Indian shipping industry more competitive. Moreover, atonnage tax scheme for taxation of shipping profits has been introduced.Many maritime nations have introduced tonnage base taxation.

Tonnage tax is a new ring-fenced regime allowing companies to elect (ona group wide basis) to have their taxable profits from shipping activitiesdetermined at fixed rates by reference to the tonnage of their ships,rather than by reference to variable business results.

After the initial understanding of the Tonnage tax I am mentioningsome of the basic features of the tonnage tax.


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BASIC FEATURESBasic features of the tonnage tax scheme are as follows:-

It is a scheme of presumptive taxation whereby the notionalincome arising from the operation of a ship is determined based on

the tonnage of the ship.

The notional income is taxed at the normal corporate rateapplicable for the year.

Tax is payable even if there is a loss in a year. A company may opt for the scheme [Form no. 65] and once such

option is exercised, there is a lock in period of 10 year. If a

company opts out, it is debarred from re entry for ten years. Since this is a preferential regime of taxation, certain conditions

like creation of reserves, training, etc. are required to be met.

A company may be expelled in certain circumstancesSince our country has followed this taxation to open up theopportunities, we need to have a brief knowledge of the internationaltax regime for the same.An overview of the international tax regime in the shipping sector -The world over, maritime countries have adopted various fiscal regimesto encourage the development of their respective shipping industries.European countries, including the UK, have provided for a tonnage taxscheme to reduce the net effective taxation rates for the domesticshipping industry to as low as 1% or 2%.

In 2002, in order to provide much- needed boost and a level playing

ground to the Indian shipping industry, the Ministry of Shippingconstituted an expert advisory committee, headed by Dr. RakeshMohan.

Therefore, The Government of India introduced the Tonnage Tax Scheme(TTS) in the Finance Act, 2004, with the intent of making the Indianshipping industry globally competitive.


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The introduction of the Tonnage tax has its roots in the demands put upby the Shipping industry. Let us see what they demanded from theGovernment:

Shipping industry demanded tonnage tax systemThe Indian shipping industry had a common grouse. It believed that theindustry was being given step-motherly treatment on various countsand that is why they demanded a level-playing field. One of the maincomplaints of the industry was about the government's failure tointroduce the system of tonnage tax.

The shipping industry, like any other industry in the country, wassubject to corporate tax whereas several leading nations accounting for85 per cent of the world shipping follow the tonnage taxation system ordual taxation system, where tonnage taxation is optional.

According to industry sources, shipping companies were less inclined toinvest more in additional tonnage due to high corporate tax. Thetonnage tax system would be considered to provide some help to thesecompanies to even out their tax burden in the industry, which washighly cyclical in nature.

As a result of corporate tax, the shipping industry faced a situationwhere taxes are high and competitiveness in the global market is low.

All these representations were made by them to the government andthere was a strong demand which led to the introduction of Tonnage TaxSystem in India.

This industry faced many setbacks but despite all this setbacks shippingcompanies is smooth sailing. Freight rates were expected to soften in the

post-Iraq war period but that hasn't happened. All leading shippingcompanies have reported outstanding performance in the past. Theirconfidence can be gauged from the fact that the companies areexpanding tonnage. Now if the government were to chip in withfavorable policy changes, the Indian shipping industry would remainabove board for a long time. This was also considered to be the reason forthe implementation of a tonnage tax.


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Tonnage Tax SchemeSome important aspects of this scheme are as follows along with thecalculations of Tonnage income.

A company owing at least one qualifying ship many join. Aqualifying ship is one with a minimum tonnage of 15 tons andhaving a valid certificate. The company has to opt for the schemewithin 3 months, i.e. any time between October 1, 2004 to December31, 2004 by making an application in the prescribed form to theconcerned Joint Commissioner who may pass an appropriate order.

Certain types of ships like fishing vessels, pleasure crafts, harborand river ferries, etc. are excluded in terms of section 115VD whichgives details of as to what ships will qualify for the scheme.

The business of operating qualifying ships is to be considered aseparate business and separate accounts are to be maintained.Section 115VG gives the manner of computation of the dailytonnage income as follows

Qualifying ship having nettonnage Amount of daily tonnageincomeUp to 1,000 ` 46 for each 100 tons

Exceeding 1,000 but not more

than 10,000

` 460 + ` 35 for each 100 tons

exceeding 1,000 tons

Exceeding 10,000 but not more

than 25,000

` 3,610 + ` 28 for each 100 tons


Exceeding 25,000 ` 7,810 + ` 19 for each 100 tons



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Benefits of tonnage tax Tonnage tax offers a new, simple, fixed rate, low tax regime for

shipping.

Companies opting into the regime will be able to enjoy certainty asto the level of taxation to be imposed on their shipping activities.

In the case of a singleton company or group of companies carryingout nothing other than shipping activities, it will greatly reducethe amount of effort required to complete annual tax returns andsignificant cost savings may be achieved.

Publicly quoted companies will derive a significant advantagefrom the regime in that their deferred tax liability in respect ofshipping will be phased out under the regime, thus increasing theirreported earnings per share and strengthening the balance sheet.

Entering into tonnage tax will see an end to tax-driven (ratherthan commercially motivated) ship investment.

The option for tonnage tax is being offered to the shipping industry

in order to create a positive fiscal environment for shipping in line withother major maritime countries. This will play a key role in deliveringthe Governments wider objective of reversing the decline in the UKfleet.


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MORE ON TONNAGE TAXLet us now proceed to some miscellaneous points which are related withthe system of Tonnage Tax.

1. Sharing objectives that have been achievedThe Tonnage Taxation System (TTS) has been introduced with theobjective of giving a much-needed impetus to the Indian shipping sector.It has, to a certain extent, proved to be a comparatively simple taxingstatute. In addition to providing a level playing ground, the tax regimeachieved the following objectives:

Between FY 2005 and FY 2010, the number of vessels and GRTincreased at CAGRs of 7.9% and 3.9%, respectively.

Indias tonnage increased from 6.9 million GRT as on 1 April 2004to 10.2 million GRT as on 1 January 2011.

(a) Income earned on investments linked to the mandatory reserve A tonnage tax company is statutorily required to transfer at least

20% of the book profits arising from its shipping business to areserve account. This account has to be utilized toward theacquisition of ships.

(b)Capital gains In the shipping industry, it is essential to replace old and obsoletevessels and upgrade vessels with newer technology. Accordingly,the qualifying vessels are required to be sold as a part of the

shipping business.

SHORT CONCLUSION-In short I can say that this system of tax has put our shipping industryat par with the international shipping activity and we hope that over aperiod of time it will help them growing in a better way.

TonnageTaxation Manish Agarwal

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