Freight Tax

What is freight tax?

Freight tax, also known as "freight income tax," is a form of income tax that is applied to the earnings generated from freight operations within India. Specifically, it is levied on the income derived from the transportation of goods, cargo, or passengers by shipping and airlines companies operating in India.

How much Freight Tax is payable?

The amount of Freight Tax payable for export loading vessels in Indian ports is 3.276% on the total freight earned by the freight beneficiary. This tax rate is governed by Section 44B and Section 172 of the Income Tax Act, 1961.

In summary, if you are a beneficiary of freight earnings from export loading vessels in Indian ports, you would be subject to a Freight Tax rate of 3.276% on the total freight income.

Is Freight Tax Exempted in India Partly or Fully?

Yes, Freight tax on exports in India can be exempted partly or fully under certain conditions. This exemption is applicable if the freight beneficiary is a resident of a country that has a Double Taxation Avoidance Agreement (DTAA) with the Indian government and complies with the relevant regulations and documentation requirements set by the Indian Income Tax Department.

Here's a summary of the exemption conditions:

1. Resident of a DTAA Country: The freight beneficiary (individual or entity) must be a resident of a country that has a DTAA in place with India.
2. Compliance with DTAA: The beneficiary must adhere to the provisions of the DTAA, which may specify the conditions and extent of tax exemption on freight income.
3. Documentation: Submission of relevant documents to the Indian Income Tax Department is typically required to claim the exemption. These documents may include certificates or proofs of residency and compliance with the DTAA.
4. Partial or Full Exemption: The extent of exemption (partial or full) may vary based on the specific terms of the DTAA between India and the beneficiary's country of residence.

It's important to note that the availability and details of such exemptions can vary depending on the specific DTAA in force and the individual circumstances of the freight beneficiary. Therefore, it's advisable to consult with tax professionals or authorities and review the relevant DTAA for precise information on the exemption applicable to a particular case.

Which Country comes under DTAA?

India has entered into Double Taxation Avoidance Agreements (DTAA) with numerous countries around the world to prevent double taxation of income and promote international trade and investment. These agreements aim to provide relief from double taxation for residents and businesses operating in both India and the respective treaty countries.

The list of countries that have DTAA agreements with India is extensive and includes countries from various regions. Some examples of countries with which India has DTAA agreements include: 

• United States
• China
• United Kingdom
• France
• Germany
• Singapore
• United Arab Emirates

Please note that this is not an exhaustive list, and India has DTAA agreements with many more countries. You can refer to the pdf attached below for more details 

What are the documents required for availing Exemption under DTAA?

The documents required for availing exemption under a Double Taxation Avoidance Agreement (DTAA) may vary depending on the specific agreement and the nature of the income being considered for exemption. However, here are some common documents:

1. Certificate of Incorporation: This is a legal document issued by the government that confirms the existence of a company. It is essential to establish the company's identity and legitimacy.
2. Certificate of Tax Residency: A Tax Residency Certificate (TRC) is a crucial document that proves a business entity's tax residency in a particular country. It helps determine which country has the primary right to tax the income.
3. Voyage Charter Party: A Voyage Charter Party is a contract between a shipowner and a charterer that outlines the terms and conditions of hiring a vessel for a specific voyage. It is essential to demonstrate the nature of the shipping activity.
4. Time Charter Party: Similar to a Voyage Charter Party, a Time Charter Party is a contract but covers the hire of a vessel for a specific period rather than a single voyage. It also helps establish the nature of the shipping activity.
5. Declarations: Various declarations are often required to ensure compliance with the specific provisions of the DTAA and to confirm the eligibility for tax exemptions. These declarations can include: 

i) Not having office, bank account in India,
ii) There is no Indian director in Board,
iii) The vessels are operating in international traffic
iii) The freight beneficiary is not NVOCC and not having slot arrangements etc.

What is income TAX NOC and Why it is required?

A Tax NOC, or Tax No Objection Certificate, is a document issued by the Income Tax Department of a country. It serves as a confirmation that the tax authorities have reviewed and assessed all relevant documents and financial information related to a particular transaction or activity and have found no objection to it from a tax perspective.

It is a vital requirement for port clearance of loading vessels in India due to taxation regulations and procedures related to freight income. Here's a concise explanation of why an Income Tax NOC is necessary:

1. Freight Tax Assessment: Freight income earned by foreign shipping companies in India is taxable. The Income Tax Authorities assess whether this tax applies to a specific shipment or voyage.
2. Determining Tax Liability: Tax authorities scrutinize shipping company documents to decide if freight tax is due or if exemptions under Double Taxation Avoidance Agreements (DTAA) or other treaties apply.
3. Tax Payment: If freight tax is applicable, the shipping company must pay the assessed amount to the Income Tax Department.
4. Issuance of NOC: After tax assessment and payment, the Income Tax Department issues an NOC. This certifies compliance with tax obligations and Indian tax laws.
5. Port Clearance Requirement: The Customs Department, overseeing port clearance, demands the Income Tax NOC as part of clearance documentation. It validates resolution of tax matters related to freight income, ensuring eligibility for port clearance.
6. Sailing Permission: Without the Port Clearance Certificate, vessels cannot depart from Indian ports. Thus, obtaining the Income Tax NOC is a critical step for a smooth departure.

Is there any Freight Tax applicable for import Shipment?

 There is no freight tax applicable on Import shipments. 

Conclusion

Freight tax, or "freight income tax," is levied on earnings from freight operations in India, primarily affecting shipping and airline companies at a rate of 3.276% for export loading vessels. Freight tax can be fully or partially exempted for residents of countries with Double Taxation Avoidance Agreements (DTAA) with India, provided they comply with DTAA provisions. The Income Tax No Objection Certificate (NOC) is essential for port clearance in India, ensuring tax compliance. Import shipments, however, are not subject to freight tax in India.

Disclaimer: This information is intended solely for general knowledge and educational purposes. Given that regulations may evolve, and various ports may have distinct procedures, we kindly request that you contact us for specific details related to the required port at the time of loading