The Tonnage Tax Scheme (TTS) under Chapter XII-G of the Income-tax Act provides eligible Indian shipping companies an option to compute income on a presumptive basis based on the net tonnage of qualifying ships rather than actual profits. To qualify, a company must be Indian, have its place of effective management in India, own at least one qualifying ship, and primarily engage in shipping operations. Qualifying ships must meet specific tonnage, registration, and certification requirements, while certain vessels are excluded. Income is calculated using prescribed daily tonnage rates, and no deductions, allowances, or set-off of losses are permitted, as these are deemed accounted for. The scheme is exercised through an application and remains valid for ten years, subject to compliance with conditions such as maintenance of separate accounts and audit reporting. The scheme may cease upon non-compliance, abuse, or loss of eligibility, with authorities empowered to withdraw benefits after due process.
Tonnage Tax Scheme
Introduction
The Tonnage Tax Scheme (‘TTS’) provides Indian shipping companies operating qualifying ships an option to compute their income on a presumptive basis under Chapter XII-G (Sections 115V to 115VZC) of the Income-tax Act. This scheme allows qualifying companies to compute income on a presumptive basis based on the net tonnage of qualifying ships. The scheme has been extended to inland vessels from Assessment Year 2026-27.
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Eligibility to Opt for TTS
A company qualifies for the TTS if it satisfies all the following conditions:
- It is an Indian company;
- Its Place of Effective Management (POEM) is in India;
- It owns at least one qualifying ship;
- Its main object is to carry on the business of operating ships.
The term POEM, as defined in this context, refers to the place where the board of directors or, where applicable, the executive directors make decisions. Where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers perform their functions.
A company is deemed to be ‘operating ships’ if it operates any ship or inland vessel, whether owned or chartered in, including arrangements such as slot, space, or joint charters. However, ships chartered out under bareboat or bareboat charter-cum-demise agreements exceeding three years are not regarded as operated by the company during the charter period.
Qualifying Ships
A ship or inland vessel is a qualifying ship if it:
- Is a seagoing ship, vessel, or inland vessel with a net tonnage of 15 tons or more;
- Is registered under specified laws, namely, the Merchant Shipping Act, 1958 (for Indian ships), licensed by the Director-General of Shipping for ships registered outside India or the Inland Vessels Act, 2021 (for inland vessels);
- Holds a valid net tonnage certificate issued as per prescribed rules and conventions.
Ships or vessels are excluded from qualifying status if they are used mainly for provision of goods or services normally provided on land, fishing vessels, factory ships, pleasure crafts, harbour and river ferries, offshore installations, or if a qualifying ship is used as a fishing vessel for more than thirty days in a year.
Computation of Income under TTS
The Tonnage Tax Scheme allows qualifying shipping companies to compute income on a presumptive basis, based on a fixed daily tonnage income multiplied by the number of days a qualifying ship is operated during the previous year. The presumptive income from a qualifying ship shall be computed as per the following:
| Qualifying ship having | Amount of daily tonnage income of each qualifying ship |
| Net tonnage up to 1,000 | Rs. 70 for each 100 tons |
| Net tonnage exceeding 1,000 but up to 10,000 | Rs. 700 + Rs. 53 for each 100 tons exceeding 1,000 tons |
| Net tonnage exceeding 10,000 but up to 25,000 | Rs. 5,470 + Rs. 42 for each 100 tons exceeding 10,000 tons |
| Net tonnage exceeding 25,000 | Rs. 11,770 + Rs. 29 for each 100 tons exceeding 25,000 tons |
No deductions for expenses and set-off of losses
Income under the Tonnage Tax Scheme is computed on a presumptive basis, and no deduction for expenses. Deductions or allowances under Sections 30 to 43B are deemed fully accounted for in the relevant previous years. However, depreciation on qualifying assets is deemed to have been claimed and allowed following prescribed methods. Common costs incurred jointly by the tonnage tax business and other businesses are allocated on a reasonable basis.
Additionally, losses cannot be carried forward or offset against tonnage income. Chapter VI-A deductions are not permitted against income under this scheme.
How to opt for the scheme
Qualifying Indian shipping companies operating qualifying ships may opt for the Tonnage Tax Scheme by applying to the jurisdictional Joint Commissioner of Income Tax (JCIT) within three months of incorporation or becoming a qualifying company. The scheme option, once approved, remains in force for ten years and may be renewed within one year of expiry.
Application to opt for the scheme must be made electronically in Form No. 65 along with the certificate of registration to the JCIT. Upon approval, the scheme applies from the assessment year relevant to the previous year in which the option was exercised.
Maintenance and Audit of Accounts
The company must maintain separate books for the tonnage tax business and submit an accountant’s report (Form No. 66) one month prior to the income tax return due date. Failure to comply invalidates the option for the relevant previous year.
Cessation of the Scheme
In the following situations, the scheme ceases to apply, and the income is computed under general provisions.:
- The company ceases to qualify;
- There is a default in transferring profits to the reserve account;
- Training requirements or chartering limits are breached;
- The scheme is abused;
- The company opts out of the scheme.
Abuse and Tax Avoidance
The scheme shall not apply if a company engages in transactions or arrangements that abuse the scheme to obtain undue tax benefits either for itself or others. The Assessing Officer, with prior approval from the Principal Chief Commissioner or Chief Commissioner, can exclude a company from the scheme upon due notice and opportunity for hearing.
