Presumptive Scheme for Cruise Shipping Business
Introduction
A non-resident engaged in the operation of cruise ships can be assessed on a presumptive basis under Section 61(2) [Table S. No. 2]. In this scheme, the income is computed on a presumptive basis at the rate of 20% of the sum received or receivable by the shipping entity from the carriage of passengers.
1. About
1.1. Objective of Presumptive Taxation Scheme under Section 61(2) [Table S. No. 2]
The presumptive taxation scheme introduced under Section 61(2) [Table S. No. 2] aims to promote India as a global cruise tourism destination by encouraging international cruise operators to participate in the Indian market. The scheme provides a clear, simple, and predictable tax structure for non-residents operating cruise ships, making it easier for them to do business in India and introducing international standards.
1.2. Applicability of Presumptive Taxation Scheme under Section 61(2) [Table S. No. 2]
1.2.1. Eligible person
The scheme applies to non-residents, including foreign companies. However, if a foreign company has its Place of Effective Management (POEM) in India, it is considered a resident and is therefore not eligible for this scheme.
1.2.2. Eligible business
The scheme is introduced for non-residents operating cruise ships. The scheme shall apply if the assessee fulfils the following conditions as prescribed in Rule 44:
(a) He operates a passenger ship having a carrying capacity of more than 200 passengers or a length of seventy-five meters or more, for leisure and recreational purposes and having appropriate dining and cabin facilities for passengers;
(b) He operates such ship on scheduled voyage or shore excursion touching at least two sea ports of India or the same sea ports of India twice;
For example, If a cruise ship departs from Mumbai, stops at Goa, and then docks at Kochi, it fulfils the ‘at least two sea ports of India’ condition. Conversely, if the ship departs from Mumbai, goes on a round trip, and docks back in Mumbai, it satisfies the ‘same sea ports of India twice’ condition.
(c) He operates such ship primarily for carrying passengers and not for carrying cargo; and
(d) He operates such ship as per the procedure and guidelines if any, issued by the Ministry of Tourism or Ministry of Ports, Shipping and Waterways
The assessee should have a regularity of business of operating ships as a condition to attract the presumptive tax scheme
The Income Tax Act doesn’t define the term ‘cruise ship’. Thus, one must understand the term as it is understood in common parlance: A large ship that stops at different ports and carries passengers who travel for pleasure
1.2.3. Area of operation – Domestic, International or Both?
Section 61(2) [Table S. No. 2] does not specify the required area of operation for cruise ships, leaving it unclear whether the non-resident operator must run routes between two Indian ports, from an Indian port to a foreign port, or solely between foreign ports.
However, Section 61(2) [Table S. No. 2] is introduced to promote domestic cruise ship operations. The aim is to make India an attractive cruise tourism destination, attract global tourists to cruise shipping in India, and popularise cruise shipping with Indian tourists. This objective suggests that the scheme is likely applicable to operations between Indian ports, aligning with the objective of promoting domestic cruise tourism. Thus, Section 61(2) [Table S. No. 2] should apply only to cruise ships operating within Indian waters.
For routes between Indian and foreign ports, or solely between foreign ports (i.e., international traffic), Section 61(2) [Table S. No. 2] may not apply. Instead, such cases would fall under the general presumptive tax scheme for non-resident shipping businesses under Section61(2) [Table S. No. 1], along with provisions of Section 316 and the relevant Double Taxation Avoidance Agreement (DTAA).
1.2.4. Is presumptive scheme mandatory or optional?
Presumptive tax schemes are of two types:
(a) Rebuttable presumptive tax scheme
In this scheme, income is presumed based on indicators like gross receipts, turnover, or capacity, but the taxpayer can claim a lower profit by maintaining accounts and having them audited under Section 63. Examples include Sections 58(2) [Table S. No. 1 to 3] and Section 61(2) [Table S. No. 4 and 5]
(b) Irrebuttable presumptive tax scheme
In this scheme, presumed income is fixed and cannot be challenged by claiming a lower actual profit. The taxpayer must accept the presumed profit as final. Section61(2) [Table S. No. 1, 2 3] fall under this category. Therefore, non-residents operating cruise ships must report income on a presumptive basis under Section 61(2) [Table S. No. 2].
1.3. Chargeability of tax on income from the operation of cruise ships
1.3.1. Cruise ships operating in domestic traffic
Domestic traffic refers to operations where a ship travels exclusively between locations within the same country. Thus, if a cruise ship’s departure and arrival points are both in India, it is considered to be operating in Indian domestic traffic.
For non-residents earning income from operating cruise ships in Indian coastal routes, the chargeability of income is assessed under the general provisions of the Income-tax Act (Section 5 and Section 9) and relevant Double Taxation Avoidance Agreements (DTAAs), specifically Article 5 (Permanent Establishment) and Article 7 (Business Profits).
Once the income is determined as taxable in India, it will be calculated under the presumptive taxation scheme of Section 61(2) [Table S. No. 2].
1.3.2. Cruise ships operating in international traffic
International traffic refers to operations where a ship travels between two or more countries
For non-residents earning income from operating cruise ships in international traffic, the chargeability of income is assessed under the general provisions of the Income-tax Act (Section 5 and Section 9) and relevant Double Taxation Avoidance Agreements (DTAAs), specifically Article 8 (International Shipping and Air Transport).
It is to be noted that chargeability of income from cruise ships operating in international traffic is dealt with under specific Article 8 of DTAA and not the general Articles 5 and 7. With the object that profits from the operation of ships in international traffic be taxed in one country alone, Article 8 of most DTAAs provides taxation right to either the country of residence or the country in which the place of effective management (POEM) of the shipping entity is situated. This means profits from international traffic are taxable only in the country of residence or POEM and not in India. However, some DTAAs (e.g., with the Netherlands and Norway) also provide limited taxing rights to the source country.
If a non-resident’s income from operating cruise ships in international traffic becomes taxable in India, it can be computed under the presumptive tax scheme of Section 61(2) [Table S. No. 1] if he opts for regular assessment. Alternatively, Section 316 permits taxation on a voyage-by-voyage basis for ships that carry passengers shipped at a port in India. In such cases, port clearance is granted only on either filing the return and paying the tax before departure or making arrangements to file the return and pay the tax within 30 days of the ship"s departure from the Indian port.
It is to be noted where a non-resident entity deriving income from the shipping business is a resident of a foreign country with which India has entered into DTAAs and such DTAA provides for taxation of shipping profits only in the country of which such entity is a resident, no tax is payable by such ships at Indian ports under Section 316. Under such circumstances, a "No Objection Certificate" is to be obtained by the master of the ship from the concerned income-tax authority
1.4. Computation of presumptive taxation scheme under Section 61(2) [Table S. No. 2]
1.4.1. Presumptive income calculation
20% of the total amount received or receivable by, or paid or payable to, a non-resident cruise ship operator for carriage of passengers is deemed to be the profits and gains from that business.
1.4.2. Will GST be included in the tariff amount?
GST collected from passengers would not form part of the tariff for computing the presumptive income
1.4.3. Applicability of other income computation provision
Section 61(2) [Table S. No. 2] overrides the provisions of sections 26 to 54. Thus, the income of a non-resident from the shipping business shall be computed on a presumptive basis, and all other additions or deductions allowable under Section 26 to 54 shall be deemed to have been allowed. However, all other provisions (other than Section 26 to 54), i.e., provisions for calculation of capital gains, set off or carry forward of losses, etc. will continue to be applicable in the case of a non-resident deriving profits from shipping business.
Additionally, this presumptive tax scheme doesn’t override the provisions of ICDS and Section 57. As cruise shipping is regarded as service contract, the profit and gains from such contract shall be recognised based on ICDS-IV read with Section 57.
1.5. Applicability of tax Audit in case of assessee covered under Section 61(2) [Table S. No. 2]
Tax audit is not be required for those declaring income under Section 61(2) [Table S. No. 2]
1.6. Exemption for lease rental of cruise ships
If a foreign company opting for this presumptive tax scheme leases a cruise ship from another foreign company, the lease rental received by the other foreign company will be exempt from tax under Schedule IV. This exemption applies provided the lessor and lessee foreign companies are subsidiaries of the same holding company.
References
Chairman, CBDT v. Chowgule & Co. Ltd. [1991] 192 ITR 40 (Kar). The ratio was laid by the High Court in context of presumptive tax scheme under section 44B for shipping business.
www.merriam-webster.com
Article 3(1)(e) of the OECD Model Tax Convention.
Essar Oil v DCIT [2006] ( 5 SOT 669)
CBDT Circular No. 732, dated 20-12-1995
CIT (International Taxation) v. Schlumberger Asia Services Ltd. [2024] 158 taxmann.com 267 (SC). The decision is rendered in the context of Sections 44BB and could be applied for Section 61(2) [Table S. No. 2].
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.