Tonnage tax scheme

Section 226 — TONNAGE TAX SCHEME

Section 226 of the Income-tax Act, 2025 corresponds to ss. 115VB, 115VE and 115VF of the Income-tax Act, 1961.

STATUTORY ARCHITECTURE

Section 226 sits in the Part of the 2025 Act containing the tonnage tax scheme. It states when a company is, and is not, regarded as operating a ship or inland vessel for the Part. It ring-fences a tonnage tax company's business of operating qualifying ships, whose profits are computed under the scheme only if an option is made as per s. 231. Finally, tonnage income computed as per s. 227 is deemed to be business profits, while the relevant shipping income referred to in s. 228(1) is not chargeable to tax.

KEY ELEMENTS

• Sub-section (1)(a): a company operates a ship or inland vessel if it operates one, whether owned or chartered by it, including where even a part is chartered in under a slot, space or joint charter.
• Sub-section (1)(b): a company does not operate a ship or inland vessel chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.
• Sub-section (2): a tonnage tax company computes the profits of operating qualifying ships under the tonnage tax scheme.
• Sub-sections (3) and (4): the tonnage tax business is a separate business, and its profits are computed separately from any other business.
• Sub-section (5): the scheme applies only if an option is made as per s. 231.
• Sub-section (6): if the company is not covered by the scheme, or has not made the option, profits are computed under the other provisions of the Act.
• Sub-section (7): subject to the Part, tonnage income is computed as per s. 227 and deemed to be profits chargeable under the head "Profits and gains of business or profession"; the relevant shipping income referred to in s. 228(1) is not chargeable to tax.

CHANGES FROM THE 1961 ACT

Section 226 combines s. 115VB, s. 115VE and s. 115VF of the 1961 Act. The words "or inland vessel", present in the 2025 text, are shown in s. 115VB of the 1961 Act as inserted by Act No. 7 of 2025, w.e.f. 1-4-2026. The bareboat exclusion, a proviso in s. 115VB of the 1961 Act, is now clause (1)(b). Cross-references are renumbered (s. 115VP to s. 231; s. 115VG to s. 227; s. 115V-I(1) to s. 228(1)). Otherwise the provisions are substantively the same.

PRACTITIONER NOTES

• Chartering in even part of a vessel is enough to be regarded as operating it.
• The scheme is optional; without an option as per s. 231, shipping profits are computed under the other provisions of the Act.
• Because the tonnage tax business is a separate business with separately computed profits, its computation must be kept apart from the company's other activities.

CROSS-REFERENCES

• s. 227 — computation of tonnage income, sub-section (7)(a)(i).
• s. 228(1) — relevant shipping income not chargeable to tax, sub-section (7)(b).
• s. 231 — the option on which the scheme depends, sub-sections (5) and (6).
• s. 115VB, s. 115VE and s. 115VF of the 1961 Act — corresponding provisions.