India on Monday operationalised the ‘significant economic presence’ regime by prescribing a threshold over which income attributable to business in the country would be taxable here.
The move would have implications for global ecommerce players that operate from jurisdictions such as Hong Kong that do not have a tax treaty with India. These come into effect from April 1, 2022, according to the notification issued by central board of direct tax late Monday.
Once the provision in introduced in the respective tax treaties such as the one with US, it would have implications for large players such as amazon, Netflix.
The provisions of significant economic presence seek to enlarge the scope of income of non-residents that accrues of arises in India, by establishing business connection of the foreign entities in India.
The income attributable on account of significant economic presence of a foreign entity in India is Taxable in India.
The concept was introduced through the finance Act 2018 and was defined to mean that any transaction in respect of any goods, services of property carried out by non-resident in India, including the provision of download of data or software in India, systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.
Threshold for transactions has been set at rs2 crores and users at 3 lakh which experts say is low and bring many non-residents under the ambit of new provision.
“If the threshold of Rs. 2 crores or 3 lakh users in met, the not-resident will be presumed to have business connection in India and will be taxed accordingly irrespective of whether the agreement is signed in India or services are rendered in India,” said sanjay sanghvi, Partner Khaitan & co.
“Considering that the threshold has been kept quite low, many non-resident would come under the ambit of SEP,” said Rakesh Nangia, Chairman Nangia Andersen India.
Nangia said non-resident can still take shelter under the tax treaties since India’s existing treaties contain the conventional concept of permanent establishment (PE) for taxing business profit of a non-resident and inclusion of SEP in the Act will not be read into the tax treaties unless they are amended.
“Though the residents of treaty countries can claim the beneficial provisions of treaty, non-treaty jurisdiction and non-residents not eligible for treaty benefit, may have to review their position on taxability and compliances,” Nangia pointed.
"These rules prescribing thresholds for SEP provisions would have limited impact as foreign multinational enterprises will get treaty protection (restrictive definition of Permanent Establishment in tax treaties." Amit Maheshwari, partner AKM Global.
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