SPC TAX TRAX

India sets thresholds for significant economic presense OF NON - RESIDENTS

By Karan Gupta | 2 min read

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KNOW HOW THE RECENT CHANGES AFFECTS YOUR BUSINESS

Financial Services

CBDT UPDATE

  1. The  Indian  Income-tax  laws  (ITA)  have  got  amended  with  effect  from  April  1,  2021 whereby specified activities undertaken beyond threshold limits shall mean SEP of non- residents in India which in turn will lead to constitution of business connection in India. In this regard, Central Board of Direct Taxes (CBDT) has recently prescribed following revenue-based and user-based thresholds to determine SEP:
  • Revenue based  threshold:  Transaction in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India, exceeding INR 20 million during the tax year; or
  • User-based threshold:  Systematic and continuous soliciting of business activities or engaging in interaction with 0.3 million or more users in India.

In case of above transactions, SEP will get constituted regardless of the following factors:

  • Agreement is entered in India or outside India;
  • Non-resident has residence / place of business in India or not;
  • Services are rendered by non-resident in India or outside India.

Once the business connection of non-resident gets established in India due to SEP, then income attributable to specified activities of the non-resident shall be taxable at the rate of 40 percent in India (plus applicable surcharge and cess). Further, following income of the non-resident shall also be taxable in India:

  • Advertisement targeting a customer who is an Indian resident or accessing the advertisement through internet protocol (IP) address located in India;
  • Sale of data collected from an Indian resident or from a person using IP address located in India;
  • Sale of goods / services using data collected from an Indian resident or from a person using IP address located in India.

SPC Comments

  1. The proposed amendment was initially introduced in ITA by the Union Budget 2018; however, the same was deferred having regard to ongoing discussion on the subject matter in G20-OECD BEPS project.
  2. Relevant to note that while SEP provisions were introduced primarily in the context of digital transactions, however, the notified statutory provisions are widely worded and apparently cover both digital and physical transactions. Further, there are other ambiguities to determine the precise ambit of SEP provisions which deem suitable clarifications.
  3. Non-residents eligible to claim relief under tax treaty may still remain outside the ambit of SEP provisions based upon restrictive provisions of tax treaty.

 

 

Way Forward

Business model of the non-residents / foreign entities having operations in India need to be carefully examined in light of the newly introduced SEP provisions, read along with the provisions of Equalisation Levy introduced in India a while back to tax specific advertisement services / e-commerce supply or services.

Indian entities making payment to non-residents falling within the ambit of SEP provisions are also hugely impacted from withholding tax perspective as any default in this regard may trigger serious tax implications.

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