Section 227 of the Income-tax Act, 2025 — Computation of Tonnage Income (Tonnage Tax Scheme for Shipping Companies)

In plain language

What Section 227 is about

Section 227 of the Income-tax Act, 2025 lays down how a shipping company's taxable income is calculated under the tonnage tax scheme. Instead of taxing the company on its actual accounting profits from operating ships, the law taxes a notional (deemed) income based purely on the size (net tonnage) of each qualifying ship and the number of days it was operated. This special provision carries forward the tonnage tax rules that existed under Section 115VG of the old Income-tax Act, 1961.

Who it applies to

• Only Indian shipping companies that have validly opted into the tonnage tax scheme (a "tonnage tax company").
• The scheme covers income from operating qualifying ships — broadly, sea-going ships of 15 net tons or more, registered and used for carrying passengers or cargo (with certain exclusions like pleasure crafts, fishing vessels, offshore installations, etc.).
• It is optional. A company must apply and be approved; once in, it is generally locked in for 10 years.

The core formula

For each qualifying ship, tonnage income is computed as:

• TI = DTI × N, where TI is the tonnage income of the ship, DTI is the daily tonnage income, and N is the number of days in the tax year the ship was operated as a qualifying ship (or part of the year if operated only part of the year).
• The company's total tonnage income is the sum of the tonnage income of all its qualifying ships.

How daily tonnage income (DTI) is fixed

DTI depends on the ship's net tonnage, using a slab table (see the table below). Importantly, tonnage is first rounded off to the nearest 100 tons — if the last figure is 50 tons or more it is rounded up to the next 100, and if less than 50 tons it is rounded down.

Key conditions and restrictions

• No deductions, no set-off: Notwithstanding any other provision of the Act, no deduction or set-off of losses is allowed against tonnage income. The deemed income is final for the covered activity.
• Deemed profits and gains: The tonnage income is treated as the profits and gains of the shipping business and charged to tax at the normal corporate tax rate applicable to the company — tonnage tax is a method of computing income, not a separate low rate.
• Documentation: Net tonnage must be evidenced by a valid tonnage certificate (e.g., an International Tonnage Certificate under the Merchant Shipping Act for Indian ships of 24 metres or more, or equivalent).
• Loss of the year: Since income is a fixed deemed amount, the company cannot report a loss from covered shipping activities under the scheme.

Joint operation of ships

• Where a qualifying ship is operated by two or more companies with definite and ascertainable shares, each company's tonnage income is a proportionate share.
• Where shares are not definite and ascertainable (e.g., pooling arrangements), the tonnage income of each company is computed as if each had operated the ship in full — so the full amount can effectively be attributed to more than one operator.

How it interacts with other provisions

• Section 227 works alongside the other tonnage-tax provisions in the same Chapter — the meaning of "qualifying ship" and "operating ships", conditions for opting in, effect of exit, and consequences of breaching conditions.
• Separate books/records must be maintained; ships not covered or income not from core shipping activity are taxed normally, outside the tonnage regime.

Practical implications for taxpayers

• Certainty: Companies know their tax outgo in advance, regardless of actual freight earnings, which helps in a volatile shipping market.
• Trade-off: In a bumper year the tonnage tax may be far lower than tax on actual profits (a big benefit); in a loss-making year the company still pays tonnage tax and cannot claim depreciation or set off shipping losses (a drawback).