Section 231: opting for the tonnage tax scheme, and its validity

Introduction

A company does not enter tonnage tax merely by operating ships: it must apply to the jurisdictional Joint Commissioner and receive an order on the option. The election normally lasts ten years, subject to conditions and exit rules.

Key takeaways

Making the application

A qualifying company may opt for the tonnage tax scheme by applying to the Joint Commissioner having jurisdiction over it, in the prescribed form and manner.

The application must be made within three months of the company's incorporation, or of the date it first becomes a qualifying company - whichever is relevant.

A Unit of an International Financial Services Centre that has availed of the deduction under Section 147 may apply within three months from the date that deduction ceases.

Approval process

On receiving the application, the Joint Commissioner may call for information or documents needed to satisfy himself of the company's eligibility, and must then pass a written order either approving or refusing the option - refusal cannot be ordered without giving the applicant a reasonable opportunity of being heard. A copy of the order is sent to the applicant.

The order must be passed before the expiry of three months from the end of the quarter in which the application was received.

Validity period

Where approval is granted, the tonnage tax scheme applies from the tax year in which the option is exercised, and remains in force for ten years from the date the option was exercised.

When the option ceases to have effect

The option for the tonnage tax scheme ceases to have effect from the tax year in which:

• The qualifying company ceases to be a qualifying company
• A default is made in complying with the conditions in Section 232(1) to (20)
• The company is excluded from the scheme under Section 234 (anti-avoidance exclusion)
• The company furnishes a written declaration to the Assessing Officer that the scheme should no longer apply to it - after which its shipping income is computed under the Act's other provisions

Renewal and the bar on re-opting

An approved option may be renewed within one year from the end of the tax year in which it ceased to have effect, and the rules governing the original application and approval apply equally to a renewal.

A qualifying company that voluntarily opts out, defaults under Section 232, or is excluded by an order under Section 234(4), is barred from opting for the tonnage tax scheme again for ten years from the date of opting out, the default, or the order.

Step-by-step flow for opting into the tonnage tax scheme under Section 231

1. 1

   Is the company a qualifying company, and is it within time?

   Apply to the Joint Commissioner with jurisdiction, in the prescribed form and manner. The time limit is three months from incorporation or from first becoming a qualifying company (Section 231(2)). For an IFSC unit that claimed the Section 147 deduction, it is three months from the date that deduction ceases (Section 231(3)).

2. 2

   Did the company opt out, default under Section 232(1) to (20), or get excluded under Section 234(4) in the last ten years?

   • Yes: It is not eligible to opt for ten years from the date of opting out, default or order (Section 231(12)).
   • No: Go to the next step.
3. 3

   Joint Commissioner examines eligibility

   The Joint Commissioner may call for information or documents. The order approving or refusing must be passed before three months expire from the end of the quarter in which the application was received (Section 231(6)). A refusal needs a reasonable opportunity of being heard (Section 231(5)).

   • Refused: The scheme does not apply.
   • Approved: Go to the next step.
4. 4

   Apply the scheme

   The Part applies from the tax year in which the option is exercised. The option stays in force for ten years from the date it is exercised (Section 231(7) and (8)).

5. 5

   Does a ceasing event occur?

   The option ceases from the tax year in which the company stops being a qualifying company, defaults under Section 232(1) to (20), is excluded under Section 234, or declares in writing to the Assessing Officer that the Part should not apply (Section 231(9)). Renewal is possible within one year from the end of the tax year in which the option ceases (Section 231(10)).

Practical checklist

Frequently asked questions