Following the introduction of a novel income-tax framework for cruise business operation (‘new tax framework’)[1] in the Union Budget announced in July 2024, the Central Board of Direct Taxes (‘CBDT’)[2] has notified conditions to be satisfied by the non-resident cruise operators under the new tax framework. Further, the new Income-tax bill, 2025 (‘ITB’), introduced in the lower house of Parliament on 13 February 2025, also proposes certain changes to the new tax framework applicable to non-residents engaged in business of operating cruise ships, with an objective to provide tax certainty. 

In Part I, we had delved into the intricacies of the new tax framework and the considerations thereunder.  In continuation, we have discussed below the recent updates for the new tax framework: 

• Section A - discusses the conditions prescribed by the CBDT in context of the new tax framework.

• Section B – discusses the provisions proposed for cruise ship operations under the ITB and the key considerations arising thereunder. 

A quick recap of the new tax framework as per Income-tax Act, 1961 (‘ITA’)

•Upto 31 March 2024, income of non-resident from operation of ships including carriage of passengers was deemed at 7.5% of the specified amounts (‘old tax framework’)[3]. 

• The new tax framework deems 20% of the following specified amounts as income of non-residents from business of operation of cruise ships subject to meeting the prescribed conditions (as discussed in Section A of this article):
• Amount paid or payable to the non-resident or any other person on his behalf on account of carriage of passengers; and
• Amount received or deemed to be received by or on behalf of the non-resident on account of carriage of passengers

Such deeming income is subject to tax at a corporate tax rate of 35%  applicable to non-residents, with effect from 1 April 2024

• Additionally, tax exemption[4] is provided to foreign companies earning income from leasing cruise ships to specified companies, subject to meeting prescribed conditions. The specified company refers to a foreign company which (i) operates cruise ships in India, (ii) opts for the new tax framework and (iii) is also a subsidiary of the same holding company as the foreign company earning lease rentals. The aforesaid tax exemption is presently available till 31 March 2030.

There is no specific provision permitting the non-resident to offer profits lower than prescribed rate of 7.5% (under the old tax framework) or 20% (under the new tax framework) unlike the framework applicable to business of extraction of mineral oil, etc (i.e. Section 44BB of the ITA) or specified business in connection with a turnkey power project (i.e. Section 44BBB of the ITA).

Section A: Conditions prescribed by the CBDT

The CBDT has notified[5] a new Rule[6] prescribing cumulative conditions to be satisfied by non-resident cruise ship operators under the new tax framework. These conditions – discussed below, comprise of technical specifications, voyage specifications, primary operations and compliance with regulatory guidelines. 

• Technical specifications – the non-resident operates a passenger ship for leisure and recreational purposes with a carrying capacity exceeding 200 passengers or having a length of at least 75 meters. Such passenger ship shall also have appropriate dining and cabin facilities for passengers

• Voyage specifications - Cruise ships are operated on scheduled voyages or shore excursions touching at least two different Indian sea ports or the same sea port twice;

• Primary operations - Cruise ship primarily operates for carrying passengers and not cargo; and

• Regulatory guidelines – the non-resident cruise operator must adhere to the procedures and guidelines set forth by the Ministry of Tourism and the Ministry of Shipping, ensuring that the cruise services align with national tourism and maritime standards

Key considerations arising in context of the aforesaid conditions

The introduction of the new Rule, while offering some clarity, has also resulted in potential uncertainties regarding the taxation of income from cruise operations in the hands of non-residents. Clarity on the following aspects is required to provide certainty to stakeholders:

• Meaning of ‘cruise ship’:

While 'cruise ship' has not been explicitly defined, on perusal of the technical specifications it appears that only large cruise ships with specified dimensions and capacity and equipped with adequate dining and accommodation facilities, are covered under the new tax framework. This leaves a room for clarity in respect of taxability of small cruise ships undertaking cruise operations in the country.

• Applicability of the new tax framework to international operations:

Income from carriage of passengers in international traffic is generally exempt under tax treaties. Scope of applicability of new tax framework appears to be broad and to include domestic and international cruise operations on bare reading of the provisions. The new Rule requires cruise ship to touch at a minimum of two different Indian sea ports or the same port twice. On conjoint reading of the conditions under the new Rule along with the memorandum and Finance Minister’s speech to Finance Bill (No.2) of 2024, it appears that the new tax framework is applicable only to domestic cruise operations undertaken in India.

In this regard, it is important that the government clarifies that the new tax framework is applicable only for cruise operations undertaken within the coastal waters of the country. 

• Taxability in case all conditions prescribed are not met

On a conjoint reading of the new tax framework and conditions notified thereunder, it appears that only cruise ships satisfying the above referred conditions shall be subject to the new tax framework. In a scenario, where any one of the afore-mentioned conditions are not satisfied, whether such non-resident will have the option to pay tax under the old tax framework would need to be evaluated.

• Specified amounts to be considered for computing deemed income

New tax framework specifies amounts which needs to be aggregated for computing deemed income at 20%. These amounts cover both amounts paid / payable and amount received/deemed to be received on account of carriage of passengers without providing any further guidance. Unlike other deeming provisions (i.e. Section 44B – for shipping operations and Section 44BBA – for airline operations), there is no reference of carriage of passengers from ‘any place in India’ or ‘any place outside India’. Further, the conditions notified do not clarify on this aspect thus leaving a doubt on the amounts to be considered for computing deemed income under the new tax framework.

• No exemption from Minimum Alternate Tax (‘MAT’) on book profits

Unlike other presumptive tax provisions (i.e. Section 44B, Section 44BB, Section 44BBA and Section 44BBB), no specific exemption from applicability of MAT on book profits is available to foreign companies engaged in cruise ship operations in India either under the existing ITA or under the proposed ITB.

• Documents to be maintained under the new tax framework

The new tax framework does not provide for any measures to be adopted by the lessor to ensure that lessee has opted to pay tax under the new framework, which is a pre-requisite for claiming exemption.

Further, the new Rule also does not mandate the lessee (i.e. non-resident cruise operator) to obtain any certificate or furnish any form to opt for the new tax framework. Clarity in terms of basic documents, declarations or forms to be maintained by the lessee and / the lessor in respect of the tax exemption claimed by the latter shall be helpful.

Section B: Provisions proposed relating to cruise operations under the ITB

The introduction of the ITB in Parliament represents a landmark moment, showcasing government's dedication to overhaul the nation's direct tax structure. The primary aim is to minimize conflicts and legal disputes, thereby providing certainty to taxpayers.

At the outset it is relevant to note that the provisions relating to presumptive taxation of non-residents / foreign companies (i.e. Section 44B, 44BB 44BBC, 44BBA, 44BBB of the ITA read with new Section 44BBD proposed by FB25) have been consolidated under a single section (i.e. Section 61 the ITB). The below table summarizes the mechanism to compute the presumptive income of specified businesses:

On comparison of  the presumptive tax provisions under the ITA and ITB, it can be observed that there is no change in the mechanism to compute the presumptive income of non-residents engaged in the above specified business. The ITB further proposes to provide non-residents with an option to be taxed on profits lower than the presumptive income computed applying the prescribed rate, which ranges from 5% to 20% of gross revenue subject to the condition of maintenance of books of accounts and getting them audited.

Thus, once the ITB is effective, a non-resident engaged in the business of operation of cruise may be eligible to offer profits lower than 20% presumptive income by meeting the specified conditions. However, it is relevant to note that where a foreign company (i.e. lessee of cruise ship) opts to offer lower profits to tax, the other foreign company (i.e. lessor of cruise ship) may not be eligible for tax exemption on the lease rentals under Schedule IV (Table S. No. 9) of the ITB (i.e. Section 10(15A) of the ITA).    

Additionally, the ITB provides mechanism for the computation of the tax Written Down Value (WDV) of assets, which is crucial for determining depreciation for tax purposes and computation of capital gains on sale of such assets. Further, it is expressly provided that set‑off of losses and claim of allowances or deduction is not permitted when calculating deemed presumptive income. 

In the below illustration it is assumed that both the lessor and lessee of cruise ship are non-residents and part of the same group. The illustration provides a comparison of tax liability – under the ITA and the ITB, in the hands of both the lessor and lessee and overall effective tax rate from group point of view: 

It can be observed from the above illustration that the effective tax rate at Group level is lower where option of net basis taxation regime is exercised as compared to presumptive taxation coupled with exemption on lease rentals. Where the net basis taxation regime option is exercised, the lease rentals payable to the foreign lessor is taxable. Having said that, the above analysis would depend on the facts of each case including the margins earned by non-resident cruise operator and thus, the decision to opt for net basis taxation or not by non-resident cruise operator may vary from case to case.

Conclusion

India's cruise industry is poised for significant growth, driven by strategic government initiatives and robust infrastructure development. The Cruise Bharat Mission focuses on addressing industry concerns and streamlining regulations to attract global cruise operators. Policies like the Shipbuilding Financial Assistance Policy and the Maritime Development Fund are fostering infrastructure development. Further, increased government allocations for maritime infrastructure, including development of modern international cruise terminals, are aimed to make India an attractive destination for international cruise operators and enhance the cruise experience for travellers.

From a corporate tax perspective, income of non-resident lessors (of cruise ship) and non-resident operators (of cruise ship) shall be governed by the provisions of the ITA which is likely to remain in force up to 31 March 2026.

Supported by: Jinit Rathod (Senior Manager, Ernst & Young LLP) and Fatema Burhanpurwala (Senior Consultant, Ernst & Young LLP)

[1] Section 44BBC of the Income-tax Act, 1961

[2] The apex body for administration of direct taxes in India

[3] Section 44B of the Income-tax Act, 1961

[4] Section 10(15B) of the Income-tax Act, 1961

[5] No. 9/2025/F.No.370142/18/2024-TPL dated 21 January 2025

[6] Rule 6GB of the Income-tax Rules, 1962

[7] Where lease income is paid by one non-resident to another non-resident, then applicable tax rate is 35% (plus applicable surcharge and cess). This rate can be further reduced through structuring mechanism. Lessor may be eligible for further lower tax rate under Double Taxation Avoidance Agreement with India which has not been considered in the above illustration.