Section 115VQ: Period for Which Tonnage Tax Option Remains in Force
Section 115VQ of the Income-tax Act, 1961 specifies how long an approved election for the tonnage tax scheme remains effective and the circumstances in which that election ends before the normal period expires. It is especially relevant to qualifying Indian shipping companies, their tax teams and advisers.
What does Section 115VQ provide?
Under the tonnage tax scheme, qualifying shipping income is computed by reference to the net tonnage of qualifying ships rather than ordinary business profits. Section 115VQ determines the duration of a company's approved option and specifies when it ceases to have effect. Approval of the option is governed by Section 115VP, while renewal is dealt with under Section 115VR.
Section 115VQ(1): Ten-year validity of the option
Once an option is approved under Section 115VP(3), it remains in force for ten years from the date the option was exercised, subject to the early-cessation provisions. Its tax effect is taken into account from the assessment year corresponding to the previous year in which the company exercised the option.
Importantly, the statutory starting point is the date of exercise of the option, not automatically the date on which the tax authority issues its approval order. Companies should preserve the application, acknowledgement, approval order and relevant filing records.
Section 115VQ(2): When does the option cease?
Even during the ten-year term, the option ceases to have effect from the assessment year relevant to the previous year in which any of the following events occurs:
Clause (a): The company ceases to be a qualifying company
If the company no longer satisfies the conditions for being a qualifying company under the tonnage tax provisions, its option ceases to apply. Eligibility must therefore be monitored continuously, rather than only when the initial application is made.
Clause (b): Default under Sections 115VT, 115VU or 115VV
Failure to comply with the requirements of Section 115VT, Section 115VU or Section 115VV triggers the statutory cessation rule. These provisions concern conditions and obligations within the tonnage tax regime; the nature and timing of any alleged default should be verified against the applicable statutory text and records.
Clause (c): Exclusion under Section 115VZC
If the company is excluded from the tonnage tax scheme under Section 115VZC, the option ceases in accordance with Section 115VQ(2)(c). This is a separate statutory ground from ordinary expiry of the ten-year option.
Clause (d): Written declaration to withdraw from the scheme
A qualifying company may furnish a written declaration to the Assessing Officer stating that the tonnage tax chapter should no longer apply to it. Thereafter, profits and gains from operating qualifying ships are computed under the other applicable provisions of the Act. The legal and financial implications of such a declaration should be assessed before filing it.
Illustrative timeline
Example: Suppose a qualifying company exercises its option on 15 July 2018 and the option is subsequently approved under Section 115VP(3). Under Section 115VQ(1), the normal ten-year period is measured from 15 July 2018, subject to the statutory rules on renewal and early cessation. If a disqualifying event occurs during previous year 2023-24, Section 115VQ(2) links cessation to the assessment year relevant to that previous year, namely assessment year 2024-25. This example illustrates the 1961 Act framework; actual treatment depends on the facts, applicable law and any transitional provisions.
Expiry, early cessation and renewal: Key differences
| Event | Legal position | Related provision |
|---|---|---|
| Normal expiry | Approved option ordinarily continues for ten years from exercise. | Section 115VQ(1) |
| Early cessation | Specified loss of eligibility, default, exclusion or written declaration ends the option earlier. | Section 115VQ(2) |
| Renewal | Continuation beyond the initial term is governed by separate renewal requirements. | Section 115VR |
| Initial application | Election and approval procedure is dealt with separately. | Section 115VP |
Compliance checklist for shipping companies
- Record the exact date on which the tonnage tax option was exercised and the date of approval.
- Monitor continuing qualification of the company and its shipping operations.
- Review obligations under Sections 115VT, 115VU and 115VV and retain supporting documentation.
- Assess whether any action under Section 115VZC affects scheme eligibility.
- Evaluate the consequences of any proposed written declaration to opt out.
- Review renewal requirements before the normal ten-year period ends.
- For tax years governed by the Income-tax Act, 2025, consult the current statutory provisions and transition rules.
Frequently asked questions
How long does a tonnage tax option remain valid?
Under Section 115VQ(1), an approved option ordinarily remains effective for ten years from the date it was exercised, unless it ceases earlier under Section 115VQ(2).
Does the ten-year period start on the approval date?
No. Section 115VQ(1) refers to the date on which the option was exercised. Approval under Section 115VP(3) is a prerequisite to the option taking effect.
Can a shipping company leave the scheme before ten years?
Section 115VQ(2)(d) provides for cessation where the qualifying company furnishes a written declaration to the Assessing Officer that the tonnage tax chapter should not apply.
What happens if a company loses qualifying status?
Section 115VQ(2)(a) provides for cessation from the assessment year relevant to the previous year in which it ceases to be a qualifying company.
Official legislation and further reading
For authoritative statutory text and amendments, consult the Income Tax Department's legislation portal, the India Code legislation database and the Income Tax Department website. Relevant related provisions include Sections 115VP, 115VR, 115VT, 115VU, 115VV and 115VZC.
This explanatory article is for general legal information. Statutory amendments, applicable tax years and individual facts may change the result.