The government in Budget 2005-06 has given shipping companies, which resented the imposition of the tonnage tax last year, a reason to cheer. With effect from April 2004, sale proceeds from ships will be taxed only partly.

While the share of the sale amount that comes came from a company's ship acquisition reserve will be taxable, the portion for which the company takes loan to purchase a ship will not be taxed.

Shipping companies that claim tax exemption under the section 33 AC of the Income-Tax Act are required to set up a dedicated fund for ship acquisition.

The tax is imposed only if sale proceeds of ships financed through this reserve are not utilised for acquisition within a year. The provision was made in order to encourage companies to invest in buying ships.

The Budget has proposed amending the section so that sale proceeds representing the debt portion are exempt. "The real intent is to restrict tax incidence to the amount utilised from the reserve account for acquiring ships," the explanatory memorandum of the Budget has said.

The benefit of this proposal will extend till 2012 when the reserve under 33 AC lapses. According to the section, the amount credited to the reserve fund each year is to be spent in the following eight years.

"This is welcome step and is, in fact, a clarification to the amendment made in 2003, when the holding period of the ship was reduced from eight years to three," said a GE Shipping executive, adding that the amendment ignored cases in which ship purchases were partly financed through debt.

However, shipping companies consider the move as a piecemeal measure, saying that the clause should be scrapped altogether with the tonnage tax in place.

Questioning the purpose of retaining the clause, an Indian National Shipping Association member said the benefit under the 33 AC was not available to shipping companies but they still had to adhere to it till 2015.