Income tax law / Shipping taxation

Section 115VZB of the Income-tax Act, 1961: Avoidance of Tax under the Tonnage Tax Scheme

Section 115VZB is a specific anti-abuse provision for shipping companies using the tonnage tax scheme. It addresses arrangements that divert tax advantages to other persons or to activities outside the tonnage tax regime.

Reviewed: 27 October 2026 | Reference to the Income-tax Act, 1961

What does Section 115VZB provide?

Chapter XII-G of the Income-tax Act, 1961 establishes a special method for computing income from the business of operating qualifying ships. Section 115VZB protects that scheme from transactions or arrangements designed to secure a tax advantage outside the intended tonnage tax treatment. Its focus is not merely the existence of a transaction with another business: the statutory test concerns an abuse of the tonnage tax scheme as described in the provision.

The section must be read alongside the rules for qualifying shipping activities, separation of non-tonnage activities, maintenance of accounts and other provisions of Chapter XII-G.

Current-law context: The Income-tax Act, 2025 came into force on 1 April 2026. Section 115VZB is the numbering used in the 1961 Act. For tax years governed by the 2025 Act, consult the corresponding operative legislation, rules and transitional provisions. The historical section is retained here for reference and earlier-year matters.

Section 115VZB explained, provision by provision

Subsection (1): The tonnage tax scheme does not apply in cases of abuse

Subject to the other provisions of Chapter XII-G, the tonnage tax scheme shall not apply where a tonnage tax company is a party to a transaction or arrangement amounting to an abuse of the scheme. Whether the provision applies depends on the nature and effect of the actual arrangement; it is not an automatic disqualification for all commercial transactions.

Subsection (2): When is a transaction an abuse?

A transaction or arrangement is considered an abuse if entering into it or applying it results, or would have resulted but for this section, in a tax advantage for either of the following:

Clause (i): A person other than a tonnage tax company.
Clause (ii): A tonnage tax company in respect of its non-tonnage tax activities.

This language expressly reaches a benefit outside the qualifying tonnage-tax business, including a benefit to a separate person.

Explanation (i): Expense, interest and cost allocation advantages

The statutory meaning of tax advantage includes an allowance for expenses or interest, or a determination, allocation or apportionment of costs or expenses, that reduces taxable income or increases a loss from activities other than tonnage tax activities. The section refers to the entries in the books of account for the previous year in which the transaction was entered into.

Consequently, shifting common financing costs, management expenses or other costs away from tonnage activities and toward an ordinarily taxed business may require particular scrutiny when it creates the statutory advantage.

Explanation (ii): More than ordinary profits

Tax advantage also includes a transaction or arrangement that produces for the tonnage tax company more than ordinary profits expected from tonnage tax activities. This rule is directed at arrangements that inflate the returns attributed to the specially taxed shipping business.

The Explanation uses the word includes; the statutory examples should not be treated as an exhaustive catalogue of possible abusive arrangements.

Illustrative situations

Examples for understanding the anti-abuse test
Situation	Potential concern
Common borrowing interest is disproportionately allocated to a non-tonnage division.	That allocation could reduce normally taxable profits or increase a non-tonnage loss under Explanation (i).
A shipping company charges an unusually high amount to a related non-shipping enterprise for a shipping service.	It may produce more than ordinary tonnage-activity profits or confer an advantage on another person, depending on the facts.
Actual shared costs are apportioned on a consistent, documented and commercially supportable basis.	Commercially justified allocation is not, by itself, proof of abuse; the statutory test still applies.

These are hypothetical illustrations, not findings that any particular arrangement is unlawful. Tax treatment depends on evidence, statutory definitions, accounting records and applicable law.

Practical safeguards for tonnage tax companies

Keep distinct records for qualifying shipping and non-tonnage business activities, consistent with Section 115VW.
Document the business purpose and commercial terms of material intercompany or connected-party arrangements.
Use defensible, consistent methods for allocating shared overheads, interest, expenses and costs.
Check whether the arrangement reduces income or increases losses of a business taxed outside the tonnage scheme.
Review whether shipping income reflects ordinary commercial returns rather than artificially enhanced amounts.
Retain contracts, invoices, allocation workings, audit trails and supporting correspondence for the relevant tax period.
Consider the interaction with other applicable anti-avoidance, transfer-pricing and reporting provisions without assuming that Section 115VZB replaces them.

Frequently asked questions

Does Section 115VZB apply only to related-party transactions?

No. Its text refers to any transaction or arrangement satisfying the statutory abuse test; it is not limited by its wording to related parties.

What is a tax advantage under this section?

It includes certain expense or interest allowances and cost allocations that reduce taxable income or increase losses outside tonnage activities, and arrangements producing more than ordinary profits from tonnage activities.

Does every high-profit shipping transaction amount to abuse?

No. The statutory question is whether the transaction or arrangement meets the anti-abuse conditions. Commercial facts and evidence matter.

Does the provision affect non-tonnage businesses?

Yes. Subsection (2)(ii) specifically addresses tax advantages obtained by a tonnage tax company in relation to its non-tonnage tax activities.

Does Section 115VZB automatically terminate the option permanently?

Subsection (1) states that the scheme shall not apply where the specified abuse occurs. The precise period and any further consequences must be determined by reading the whole Chapter and the law applicable to the relevant year; this section should not be paraphrased as an unconditional permanent ban.

Official law and government resources

This article is an explanatory reference to Section 115VZB of the 1961 Act. Verify the authoritative text, relevant amendments, operative tax year and transitional provisions before relying on it for a filing or transaction.