After months of lobbying by the shipping firms, the government on Thursday announced an optional tonnage tax to make Indian shipping industry globally competitive.

"The shipping industry has demanded the levy of a tonnage tax to make it competitive. Tonnage tax will also induce more ships to fly the Indian flag. I propose to accept the request," Finance Minister P Chidambaram said in the Budget speech.

Under the new scheme, the tax, at the rate of current corporate tax, will be charged on notional income calculated at a fixed rate based on the net registered tonnage of the company.

Consequently, the concessional regime under Section 33 AC will be withdrawn and shipping companies will now have only an option to pay the tonnage tax or normal corporate tax on profits.

Tonnage tax is a global practice of taxing shipping companies. It is calculated on a flat rate on the Net Registered Tonnage of the company after presuming a certain income on the same.

In India, shipping companies were taxed like any other company at the corporate tax rate of 35 per cent. After factoring the benefits available to shipping companies under section 33AC of the Income Tax Act of India, the effective tax paid by Indian shipping companies was around 10-14 per cent.