India notifies digital tax threshold of Rs 2 crore and 300,000 users

This is part of the Significant Economic Presence (SEP) principle, which was introduced in the Finance Bill 2018-19

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Google | Facebook | equalisation levy


Dilasha Seth  | 
New Delhi 

India on Monday notified a revenue threshold of Rs 2 crore and a limit of 300,000 users for non-resident technology firms such as Google, Facebook, Netflix, to pay tax in India under new or revised bilateral tax pacts.

This is part of the Significant Economic Presence (SEP) principle, which was introduced in the Finance Bill 2018-19, and which widened the scope of ‘business connection’ to include provision of download of data or software, if aggregate payments from such transactions exceed a prescribed amount, or if a multinational’s interaction is with a prescribed number of users.

“…the amount of aggregate of payments arising from transaction, or transactions of goods, services or property carried out by a non-resident, with any person in India…including download of data or software in India during the previous year, shall be Rs 2 crore…the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakh,” said the notification issued by the ministry of finance.

This will come into effect from April 1, 2022.

However, the existing double taxation avoidance agreements will not be covered under the proposed change, implying that in order to tax Facebook, Google and the like, India will require to renegotiate the tax treaty with the US.

The digital companies will come under India’s tax net only when the existing treaties get reviewed or when new ones are signed.

“Considering that the threshold has been kept quite low, many non-residents would come under the ambit of SEP. However, a 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 profits of a non-resident and the inclusion of SEP in the Act will not be read into the tax treaties unless they are amended,” said Rakesh Nangia, managing partner, Nangia Anderson LLP. “Though the residents of treaty countries can claim the beneficial provisions of treaty, non-treaty jurisdictions and non-residents not eligible for treaty benefit, may have to review their position on taxability and compliances,” he added.

The SEP provision was deferred till 2022-23 on grounds that a multilateral solution under OECD is being deliberated where all tax treaties will get amended automatically. Around 130 countries are striving to arrive at a consensus-based solution by mid of the year to tax digital entities that end up not paying taxes in countries from where they earn income as traditional taxation rules require a physical presence.

However, India has, in the meantime, expanded the scope of the equalisation levy over the last few years, to tax non-resident digital entities. While the levy applied only to digital advertising services till 2019-20 at the rate of 6 per cent, the government in April last year widened the scope to impose a 2 per cent tax on non-resident e-commerce players with a turnover of Rs 2 crore. The scope was further widened in the Finance Act 2021-22 through a clarification to cover e-commerce supply or service when any activity, including acceptance of the offer for sale, placing the purchase order, acceptance of the purchase order, supply of goods or provision of services, partly or wholly payment of consideration, takes place online.

Four years ago, India had revised its tax pacts with low or zero tax jurisdictions such as Mauritius, Singapore, and Cyprus gaining taxation rights over capital gains to plug loopholes.

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