Section 44B and Section 172 of the Income Tax Act: A Detailed Overview
Updated: Oct 27
India boasts 13 significant ports and a 7,517-kilometer-long coastline. The tax laws pertaining to shipping must be properly specified because a significant amount of trade in our nation is conducted through this route. The Income-tax Act of 1961's Sections 44B and 172 both address tax regulations pertaining to the shipping industry. These parts encourage investments and economic growth by streamlining the shipping industry's taxes. The tax provisions for these parts are explained in further detail in this article.
Table of content
What is Section 44B of the Income Tax Act?
The Income Tax Act's presumptive taxation system includes Section 44B. It addresses how shipping companies that transport cargo or passengers to or from an Indian port are taxed on their income in relation to non-residents and foreign businesses. For instance, Ship X travels to the Poti Maritime Shipping terminal in Georgia from the port of Haldia. The foreign shipping company was paid Rs. 50 lakhs in Turkey and Rs. 1 crore in India. The shipping company has an assumed tax liability of Rs. 4.5 lakhs. As a result, the value of the goods received in India is 7.5% of the total revenue. Handling or demurrage charges are examples of additional charges.
Taxation Provision of Section 44B
7.5% of their total receipts would be used to determine their taxable income if they decide to file taxes under this clause. Anybody who receives payment or compensation for shipping on behalf of the assessee is subject to this requirement. The assessee is unable to take advantage of the deductions granted under Sections 28 through 43A for business and professional profits and gains. A non-resident will be required to pay taxes under the standard tax slabs for profits and gains from business and profession if they choose not to use presumed taxation for their shipping company. Section 44B exclusively applies to non-resident taxpayers. Alternatively, its provisions are comparable to the presumptive taxes provided by sections 44AD or 44ADA for resident taxpayers.
Understanding Foreign Shipping Business
Any ship that is owned by or chartered by a non-resident and that is used to transport cargo, passengers, mail, or animals to or from an Indian port. Any money collected in connection with this type of carriage will be considered revenue for the shipping company. The demurrage or handling fees associated with such carriage are also included in this income.
Applicability and Turnover Limit for Section 44B
We will explain the applicability and turnover limit for Section 44B with an illustration. Mr. A, a foreign resident who works in shipping, transports the following goods:
Commodities worth Rs. 70 lakh being shipped from the port of Chennai to a port in Germany, plus handling fees of Rs. 2.
Cars valued at Rs. 1 crore were shipped to Sri Lanka, along with handling fees of Rs. 0.75 lakh.
Passenger transport in India for payments totalling Rs. 2 crore.
Carry forward of Rs. 1,000,000 in losses from an Indian manufacturing company.
His taxable income will therefore be determined as follows:
75% of 2 lakhs rupees equals 2,00,000 * 7.5% = Rs. 15,000
Rs. 15,00,000 is 7.5% of Rs. 2 crore.
Less: Carry forward Rs. 1,000,000 in losses
Thus, Mr. A's total taxable income will be Rs. 14,15,000 in total.
It is significant to remember that, for tax purposes, only goods received in or exported from India were deemed to be income. Therefore, for taxation purposes, we have not taken into account the goods that were shipped to Sri Lanka.
Benefits of Section 44B
Shipping businesses that are not residents or foreign companies that operate in India can profit from the following under Section 44B:
These companies' tax compliance process is made simpler by the presumptive basis used in the computation of taxable income.
The 7.5% tax rate is less than the regular tax rates that resident corporations must pay.
These enterprises' taxable revenue is decreased by the deductions permitted from the gross freight charges, which lowers their tax obligations.
What is Section 172 of the Income Tax Act?
This section applies to non-residents who work in the shipping industry and move cargo, people, or animals out of an Indian port. This clause will determine the taxable income as 7.5% of the amount paid as transportation charges to the owner or charterer of the vessel. In addition, the individual working as the ship's master is required by this provision to provide tax returns for any amount paid or payable for shipping at a port. The requirements for port clearance and the penalties for noncompliance are also outlined in Section 172.
Shipping Business of Non-residents
Any foreign person or firm that ships goods to or from India is subject to the regulations in this section. Every kind of transportation to or from India is taxable for the purposes of Section 44B. Only transportation from India is taken into account in the context of Section 172. The ship must be hired by the non-resident or belong to them in order for it to qualify under these sections.
Income From Shipping Business for Non-residents
A non-resident's revenue from a shipping company is calculated as follows:
Any sum paid to or received for travel to or from India. It covers the movement of people, mail, products, and animals.
Any sum for transportation made outside of India that is received, payable, or assumed to be received or due in India.
Managing or detention fees.
A non-resident must report 7.5% of the total revenue as income from the shipping business if they elect to pay taxes under this clause.
There are no deductions allowed for costs from Sections 28 through Section 43A under either Section 44B or Section 172. However, this excludes any set-off or carry-forward of losses or deductions under Chapter VI-A, if any. This implies that the assessee may deduct whatever losses they have from their taxable income.
Applicability and Turnover Limit for Section 172
Before the ship leaves India, the master of the ship must pay this tax and submit their return. The assessee must, however, demonstrate that they have plans in place to submit tax reports to the assessing officer in the event that the shipmaster is unable to do so for any reason. If the officer is satisfied, he or she will grant the ship port clearance, assuming the ship master has made arrangements and designated a substitute to pay the tax in lieu of the master. Within 30 days of the ship's departure, this tax must be paid.
Illustration: A foreign shipping company completed the following transportations:
Livestock from Chennai port to Singapore for Rs. 45 lakh.
Rs. 1 crore was paid in India for the transportation of commodities from Malaysia to Singapore.
Rs. 2 crore worth of goods were sent from Mumbai to Malaysia. In Malaysia, goods charges are to be paid.
For Rs. 3 crore, goods valued at Rs. 75 crore were delivered from Bangalore to Dubai.
The entire taxable income for this business would be:
7.5% of Rs. 45,00,000 = Rs. 3,37,500
7.5% of Rs. 1 crore = Rs. 7,50,000
7.5% of Rs. 2 crore = Rs. 15,00,000
7.5% of Rs. 3 crore = Rs. 22,50,000
The entire amount liable to be withheld would be 48,37,500. Currently, a foreign company's applicable corporate tax rate in India is 40%. Therefore, the amount of tax due, without the cess and surcharge, would be Rs. 19,35,000.
Conclusion
The purpose of sections 172 and 44B is to make taxes on non-residents involved in the maritime industry simpler. Section 44B overwrites Sections 28 through 43A, while Section 172 overwrites the whole Income Tax Act. This is the primary difference between these two sections of the Income Tax Act. As a result, an assessee may use Section 44B to set against their losses and claim a Chapter VI A deduction. However, assessees under Section 172 are not permitted to use this provision.
FAQ
Q1. What is section 44B of the Income Tax Act?
The taxation of income received by a foreign shipping firm or non-resident shipping business operating in India is covered by Section 44B. This section contains provisions pertaining to the calculation of income, tax rates, and allowable deductions under this act.
Q2. What is a foreign shipping business?
A shipping company that operates any ship carrying people, cargo, mail, or other items that are shipped by a non-resident to an Indian port.
Q3. What is the income tax for the shipping business?
This clause computes a tax rate equal to 7.5% of the amount paid in shipping fees to the vessel's owner or charter.
Q4. Who is eligible for getting benefits under Section 44B?
Under Section 44B of the Income Tax Act, international or non-resident shipping businesses doing business in India may be entitled to claim benefits.
Q5. What are the conditions to avail of the benefits under Section 44B?
A non-resident shipping company or foreign shipping firm that operates ships in Indian territorial waters and is involved in the business of transporting passengers or products by ship is eligible to get advantages under Section 44B. The company must also not have a permanent establishment in India.
Q6. How is taxable income calculated under Section 44B?
Under Section 44B, the amount of taxable income is determined presumptively. The non-resident shipping company or foreign shipping company is entitled to collect 7.5% of the gross freight charges as income.
Q7. What is the tax rate under Section 44B?
When calculating the presumptive income in accordance with Section 44B's provisions, the tax rate that applies is 7.5%.
Q8. How is tax liability computed under Section 44B?
The calculation of tax liabilities under Section 44B involves multiplying the presumptive income by the 7.5% tax rate.
Q9. What is Section 172 of the Income Tax Act?
Non-residents' shipping businesses are covered by Section 172. The method of tax levy and recovery for any ship owned or chartered by a non-resident that transports people, animals, mail, or cargo that is shipped into an Indian port is outlined in Section 172(1).
Q10. What is the difference between Section 44B and Section 172 of the Income Tax Act?
Section 172 is only applicable when shipping takes place at an Indian port. On the other hand, section 44B is applicable when shipping happens at a port in India or outside of India (where the currency is received or deemed to be received in India).
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