PROJECT REPORT ON

TONNAGE TAXATION
MADE BYNAME MANISH AGARWAL ROLL NUMBER 602 ROOM NUMBER-32
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INDEX

TOPIC 1. Introduction 2. Basic Features 3. Shipping Industry demanded Tonnage Tax System 4. Tonnage Tax Scheme 5. Benefits 6. More on Tonnage Tax 7. Reference

PAGE NO. 3 4 5 6 7 8 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 carrying capacity. The tax on tonnage was introduced by the Mr. Jaswant sinha in 2003 2004 in the interim budget. With the introduction of the tonnage tax, the Government not only met a long-standing demand of the shipping industry, but also created an atmosphere that enables Indian lines to compete successfully against their rivals anywhere in the world. In other words, it was introduced to make the Indian shipping industry more competitive. Moreover, a tonnage 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 (on a group wide basis) to have their taxable profits from shipping activities determined 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 mentioning some of the basic features of the tonnage tax.

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BASIC FEATURES
Basic features of the tonnage tax scheme are as follows: It is a scheme of presumptive taxation whereby the notional income 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 rate applicable 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 circumstances Since our country has followed this taxation to open up the opportunities, we need to have a brief knowledge of the international tax regime for the same.

An overview of the international tax regime in the shipping sector The world over, maritime countries have adopted various fiscal regimes to encourage the development of their respective shipping industries. European countries, including the UK, have provided for a tonnage tax scheme to reduce the net effective taxation rates for the domestic shipping 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 Shipping constituted an expert advisory committee, headed by Dr. Rakesh Mohan. Therefore, The Government of India introduced the Tonnage Tax Scheme (TTS) in the Finance Act, 2004, with the intent of making the Indian shipping industry globally competitive.
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The introduction of the Tonnage tax has its roots in the demands put up by the Shipping industry. Let us see what they demanded from the Government:

Shipping industry demanded tonnage tax system

The Indian shipping industry had a common grouse. It believed that the industry was being given step-motherly treatment on various counts and that is why they demanded a level-playing field. One of the main complaints of the industry was about the government's failure to introduce the system of tonnage tax. The shipping industry, like any other industry in the country, was subject to corporate tax whereas several leading nations accounting for 85 per cent of the world shipping follow the tonnage taxation system or dual taxation system, where tonnage taxation is optional. According to industry sources, shipping companies were less inclined to invest more in additional tonnage due to high corporate tax. The tonnage tax system would be considered to provide some help to these companies to even out their tax burden in the industry, which was highly cyclical in nature. As a result of corporate tax, the shipping industry faced a situation where taxes are high and competitiveness in the global market is low. All these representations were made by them to the government and there was a strong demand which led to the introduction of Tonnage Tax System in India. This industry faced many setbacks but despite all this setbacks shipping companies is smooth sailing. Freight rates were expected to soften in the post-Iraq war period but that hasn't happened. All leading shipping companies have reported outstanding performance in the past. Their confidence can be gauged from the fact that the companies are expanding tonnage. Now if the government were to chip in with favorable policy changes, the Indian shipping industry would remain above board for a long time. This was also considered to be the reason for the implementation of a tonnage tax.
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Tonnage Tax Scheme

Some important aspects of this scheme are as follows along with the calculations of Tonnage income. A company owing at least one qualifying ship many join. A qualifying ship is one with a minimum tonnage of 15 tons and having a valid certificate. The company has to opt for the scheme within 3 months, i.e. any time between October 1, 2004 to December 31, 2004 by making an application in the prescribed form to the concerned Joint Commissioner who may pass an appropriate order. Certain types of ships like fishing vessels, pleasure crafts, harbor and river ferries, etc. are excluded in terms of section 115VD which gives details of as to what ships will qualify for the scheme. The business of operating qualifying ships is to be considered a separate business and separate accounts are to be maintained. Section 115VG gives the manner of computation of the daily tonnage income as follows

Qualifying ship having net Amount of daily tonnage tonnage income

Up to 1,000 ` 46 for each 100 tons

Exceeding 1,000 but not more ` 460 + ` 35 for each 100 tons than 10,000 exceeding 1,000 tons

Exceeding 10,000 but not more ` 3,610 + ` 28 for each 100 tons than 25,000 Exceeding 25,000 exceeding 10,000 tons ` 7,810 + ` 19 for each 100 tons exceeding 25,000 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 as to the level of taxation to be imposed on their shipping activities. In the case of a singleton company or group of companies carrying out nothing other than shipping activities, it will greatly reduce the amount of effort required to complete annual tax returns and significant cost savings may be achieved. Publicly quoted companies will derive a significant advantage from the regime in that their deferred tax liability in respect of shipping will be phased out under the regime, thus increasing their reported earnings per share and strengthening the balance sheet. Entering into tonnage tax will see an end to tax-driven (rather than 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 with other major maritime countries. This will play a key role in delivering the Governments wider objective of reversing the decline in the UK fleet.

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MORE ON TONNAGE TAX

Let us now proceed to some miscellaneous points which are related with the system of Tonnage Tax. 1. Sharing objectives that have been achieved The Tonnage Taxation System (TTS) has been introduced with the objective of giving a much-needed impetus to the Indian shipping sector. It has, to a certain extent, proved to be a comparatively simple taxing statute. In addition to providing a level playing ground, the tax regime achieved the following objectives: Between FY 2005 and FY 2010, the number of vessels and GRT increased at CAGRs of 7.9% and 3.9%, respectively. Indias tonnage increased from 6.9 million GRT as on 1 April 2004 to 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 a reserve account. This account has to be utilized toward the acquisition of ships. (b) Capital gains In the shipping industry, it is essential to replace old and obsolete vessels and upgrade vessels with newer technology. Accordingly, the qualifying vessels are required to be sold as a part of the shipping business. SHORT CONCLUSIONIn short I can say that this system of tax has put our shipping industry at par with the international shipping activity and we hope that over a period of time it will help them growing in a better way.
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