Section 115VZ of ITA, 1961 : Section 115Vz: Demerger

Explanation using Example

Imagine a shipping company, Oceanic Transports Ltd., that is currently paying taxes under the tonnage tax scheme, which is a special tax regime for shipping companies based on the tonnage (capacity) of their ships rather than their actual profits. Oceanic Transports Ltd. decides to undergo a corporate restructuring and demerges its cargo business into a new company called Cargo Movers Ltd.

According to Section 115VZ of the Income-tax Act, 1961, since Oceanic Transports Ltd. is already part of the tonnage tax scheme and the demerger happens before this scheme expires, Cargo Movers Ltd. can continue to benefit from the tonnage tax scheme for the remaining duration of the scheme, given that Cargo Movers Ltd. also qualifies for it. This means that Cargo Movers Ltd. will not have to pay taxes based on its actual profits but can continue to pay taxes based on the capacity of its ships, which can be financially advantageous.