Foreign shipping companies
Increase in percentage of deemed income under presumptive taxation and shift to taxation on actual profits
Current Situation: Under the existing provisions of the Act, an amount equal to 7.5 percent of the prescribed freight income is deemed to be the profits and gains of a foreign shipping company engaged in shipping business. The effective rate of taxation comes to 3.17 percent of freight collection (including applicable surcharge and education cess).
DTC Proposals: The presumptive percentage of income has now been raised from 7.5 percent to 10 percent of the transportation charges. Further, the amount of income determined above shall be further increased by the excess of the amount of income actually earned from the business over the amount specified above (i.e. 10 percent of transportation charges).
Our Comments: The presumptive basis of taxing shipping profits of foreign shipping companies was introduced mainly due to difficulty faced by foreign shipping companies in computing their Indian profits due to their worldwide operations. However, the above proposal seems to suggest shift in taxing the foreign shipping companies from presumptive basis to actual basis. The above development brings in an uncertainty as to whether it intends the foreign shipping companies to prepare books of accounts and compute their Indian shipping profits, which would defeat the very basis of presumptive taxation.
Inclusion of Slot charter, Space Charter and Joint Charter under the Shipping Business
Current Situation: The existing provisions of section 44B / 172 are silent on whether income derived from slot charter / joint charter arrangements would be treated as shipping profits.
DTC Proposal: The scope of the shipping profits (termed as transportation charges) specifically includes the arrangement under slot charter, space charter and joint charter as constituting business of operations of ship.
Our Comments: This is a positive development settling the ambiguity on whether the aforesaid arrangements are part of shipping operations. However, it will interesting to examine the tax department approach going forward assessments / litigation wherein they are denying the Treaty Benefits to the foreign shipping companies in respect of slot charter arrangements.
Scope of transportation charges
Current Situation: The scope of freight income includes export freight (wherever received) and import freight received in India. Further, the charter hire charges especially bareboat charter are not treated as shipping profits.
DTC Proposals: DTC have settled the ambiguity created by earlier DTC draft under the definition of ‘transportation charges’ which suggested import freight received outside India would be taxable in India. However, an unintended anomaly is created under Clause 5 of DTC, whereby, it seems to cover import freight received outside India as income deemed to accrue in India. Further, the charter hire charges (both bareboat and time charter) in relation to carriage of goods, passengers, etc. are now included within the ambit of transportation charges.
Our Comments: The clarity on taxability of import freight and inclusion of charter hire charges in transportation charges is a positive development. However, further clarity is expected to remove the above anomaly in respect of import freight received outside India under Clause 5 of DTC.
Indian shipping companies – Tonnage Tax Companies
Earning from pooling arrangements
Current Situation: Under the existing provisions of Tonnage Tax Scheme (‘TTS’) in the Income-tax Act 1961 (‘the Act’), the shipping contracts in respect of earning from pooling arrangements are specifically covered under the definition of ‘core activities’ of a tonnage tax company.
DTC Proposal: Interestingly, under the DTC, the definition of ‘core shipping activities’ does not include earnings from pooling arrangements.
Our Comments: The pooling arrangements are very common and integral part of the shipping activities. In fact, profits from such pooling arrangements forms part of shipping profits in almost all the Tax Treaties which India has entered into with other countries. Exclusion of pooling arrangements from ‘core shipping activities’ would thus imply that profits from such arrangements may be subject to tax as per normal provisions of the Act instead of preferential tax treatment enjoyed under the existing TTS. This could hurt tonnage tax companies by way of bringing in uncertainty / creating interpretation issues.
Non-shipping receipts taxable on gross basis
Current Situation: Presently, the non-shipping receipts of tonnage tax companies are computed as per the normal provisions of the Act, i.e., on net basis.
DTC Proposal: Under the DTC, shipping profits of tonnage tax company to include total tonnage income and other receipts on ‘gross basis’ (e.g. write back of loan, recovery of bad-debts, reimbursement of expenses, etc.).
Our Comments: The language employed in explaining shipping profits seems to suggest that no deduction of expenses would be allowed against other receipts (i.e. non-shipping receipts) of tonnage tax companies. This is a negative development and against the cardinal principle of taxing only the ‘net income’. This move could adversely impact the tonnage tax companies which are subject to lower taxation under TTS.
No MAT on book profits from core shipping activities
Current Situation: As per section 11 5VO of the Act, no MAT is payable on book profits derived from core and incidental shipping activities of tonnage tax companies.
DTC Proposal: Similar no MAT benefit has been extended to book profits derived from core shipping activities of tonnage tax companies.
Our Comments: This is a positive development and comes as a relief to tonnage tax companies, especially, considering the fact that MAT relief was not extended to tonnage tax companies under the earlier DTC draft.
Chartering of qualifying ship on bareboat charter terms
Current Scenario: The ship chartered out on a bareboat charter-cum-demise terms or on a bareboat charter terms for a period exceeding three years is not treated as operation of ship for the purpose of TTS.
DTC Proposal: Under the DTC, only ship chartered out on a bareboat charter-cum¬demise terms would not be treated as operation of ships under TTS. Further, the scope of permissible incidental activities has been widened to include activity relating to chartering out on bareboat charter terms without any time limit.
Our Comments: This is a positive development of removing the time limit of three years for availing the benefit of TTS in respect of charter hire charges on bareboat charter. Consequently, such arrangements would be subject to preferential tax treatment available under TTS to tonnage tax companies.
Concluding Remarks:- It’s interesting to note the path of the Direct Tax Code from the Act to from the 2009 Bill to the 2010 one. The exclusion of pooling arrangement from TTS and taxation of other receipts on gross basis would have far reaching impact on the Indian shipping companies. As regards foreign shipping companies are concerned, clarity on taxation of import freight and inclusion of arrangements such as slot charter, joint charters is a positive development. However, the decrease in corporate tax is offset by increase in the presumptive tax rate to 10 percent and shift from taxing shipping income under presumptive basis to actual basis.