| 4.1.3 Corporate Income Tax on Interest
As mentioned above the Indian tonnage tax regime requires the creation on a compulsory basis of a special reserve to be utilised for acquisition of tonnage within a period of eight years. While waiting for the accumulation of sufficient reserves and the opportune time for acquisition of tonnage the amounts in the reserve earn interest, which is liable to income tax at present. While in most jurisdictions investment income is no doubt outside the tonnage tax system no other country with a tonnage tax system requires the creation of reserve for acquisition of ships. Taxation of interest income arising from the special reserve, which has been created compulsorily as a condition of the operation of the tonnage tax regime clearly erodes the benefit of the regime. In Double Taxation Agreements with a number of countries, viz., Belgium, China, Denmark, Germany, Netherlands, Mauritius, South Africa, Sri Lanka and the USA, interest on funds has been treated as income arising from shipping operations. Consistency of approach in our tax laws would also require the interest income to be treated as income from shipping operations and brought within the purview of the tonnage tax regime. There is therefore a case for the interest earned from special reserves to be treated as income from core activities and covered within the scope of the tonnage tax regime.
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