In todays’ world technology plays a vital role in making our daily life simpler. Everything seems impossible without technology whether it is medical diagnose or business operation, communication or education. This COVID 19 pandemic has evidenced the same. During the complete lockdown things has been paused but nothing stopped. Technology has changed every facet of our lives, changing the way we work, learn and shop.
There has been an ongoing instance shift in business from physical to digital. With advancement of technology, it is possible for digital businesses to operate in various markets worldwide. Increasing dependency on such technology has helped companies to accelerate with escalated revenues. Such companies operate in various countries without having physical presence and with limited managerial jurisdiction. Many countries provide a huge base of customers and help them earn big sum but for no gain. This has been a pinching point for such countries for years.
India being a developing country is a broad market for such technology giants providing a huge subscriber base. It is quite justified if the country claims its fair share of the mushrooming revenues of these technology companies. This is the reason for the implementation of the concept of ‘Significant Economic Presence’ in the Indian Income Tax Law. The Finance Act, 2018 has broaden the scope of Business Connection to include SEP so bringing in the Indian operations of such foreign corporations within the ambit of the Indian Tax System.
What is the Meaning of Significant Economic Presence?
Significant Economic Presence refers to the transactions of goods & services with any person in India, including provision of download of data or software in India, if either of the following conditions is met:
1. The aggregate of payments raised from such transactions exceeds a specified limit, or
2. The engagement with Indian consumers exceeds specified number
This inclusion has disseminated the scope of income of a non-resident that arises in India and taxable in India. This concept basically targeted income from those who are doing operations in online/ digital space such as e-commerce business & online streaming.
In 2018, when the scope of business connection was broaden, the thresholds were not defined. It waited for Organisation for Economic Co-operation and Development (OECD) nations to develop a consensus where most of such tech-giants are based. But it didn’t come from their side. In May 2021, India come a step ahead with threshold limits to operate the Significant Economic Presence for non-resident companies.
How Government prescribed limits for SEP?
- Transaction of goods and services carried out by a non-resident with any person in India including provision of download of data or software in India, if the payment aggregate arising from such transactions during the PY exceeds INR 20 million or
- Engaging in interaction with more than 3 lacs users in India or systematic & continuous soliciting of business activities.
IT law was amended recently to provide that SEP would include the income from:
- Advertisement whose target audience is Indian resident customer or a customer accessing the advertisement through an Indian IP address
- Sale of data collected from the persons who use an Indian IP address or the Sale of data collected from Indian residents.
- Sale of goods or services using data collected from the persons who use an Indian IP address or Sale of goods or services using data collected from the Indian residents.
The above list is not an exhaustive list. Any revenue engendered from activities which comes under the definition of Significant Economic Presence would also be taxed.
Ambiguities still to be addressed for SEP
1. In order to avoid double taxation of income across world, every country enters into DTAA (Double Taxation Avoidance Agreement) with various nations. DTAAs do not provide for taxation of business income of non-residents in the absence of Permanent Establishment (PE) of the non-resident in the source country. Thus, unless the provisions of DTAA are restructured to incorporate changes according to the SEP, the impact of the same would be limited. Currently, it would be applicable only to those non-residents who are residing in countries with which India does not have tax treaty and to those non-residents who are not eligible to claim benefits of Double Taxation Avoidance Agreement.
2. There are some uncertainties come with Significant Economic Presence scheme which needs to be clarified before the same could be implemented.
- The phrase systematic and continuous in the definition of SEP must be elaborated.
- Data source for the above transactions need to be figured out
- The threshold limits seems to be on a lower side, India needs to be reworked with consensus of OECD nations.
- It is still not clear that only resident users will be considered for calculating the threshold limits or any user located in India using Indian IP address at the time of undertaking the transaction would also be taken into account.