Income Tax Dept sets threshold for significant economic presence

The Income Tax Department on Monday notified a threshold for Significant Economic Presence (SEP). This will come into effect from April 1, 2022. However, experts are not much convinced about the new threshold

According to a gazette notification dated May 3, for the thresholds “the amount of aggregate of payments arising from transaction or transactions 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 during the previous year, shall be two crore rupees.” Also, the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakhs, the notification mentioned.

Commenting on the development, Amit Maheshwari, Tax Partner, AKM Global, said the rules prescribing thresholds for SEP provisions would have limited impact as foreign MNEs (multi-national enterprises) will get treaty protection (restrictive definition of PE in tax treaties). The government has shown its intent earlier that it may look to amend treaties and negotiate keeping the SEP provision as a base. “These thresholds are quite low and may not be agreeable to other foreign nations. Most digital companies are from the US and the US seems to be of the view that only the top digital companies should be liable to pay tax,” he said.

The provisions of Significant Economic presence enlarge the scope of income of non-residents that accrues or arises in India, by establishing a ‘business connection’ of foreign entities in India. The income attributable on account of ‘significant economic presence’ of a foreign entity in India is taxable in India. SEP was introduced vide Finance Act 2018 and was defined to mean transaction in respect of any goods, services or property carried out by a non-resident in India, including the provision of download of data or software in India, subject to payment threshold to be prescribed; or 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

Rakesh Nangia, Chairman, Nangia Anderson says India being amongst the trailblazers, adopted SEP to address challenges of taxing the digital economy way back in 2018, the ‘prescribed threshold’ has been defined after a long wait and makes the provisions governing SEP functional with effect from April 1, 2022.

Notably, SEP can trigger irrespective of whether the agreement for transaction or activity has been entered in India, whether the non-resident has a residence or place of business in India, whether the non-resident renders services in India. Though the provisions of SEP have been in place for more than three years, the same remained inoperative in absence of the thresholds.

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. 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 review their position on taxability and compliances,” he said.

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