India Notifies Rules For Digital Tax 
The logos for Facebook, Amazon, Netflix, and Google on smartphone and tablet devices. (Photographer: Jason Alden/Bloomberg)

India Notifies Rules For Digital Tax 

Starting April 2022, overseas entities that don’t have a physical presence in India but derive significant financial benefit from Indian customers will come under the Indian tax net. The levy will impact technology giants like Facebook Inc., Google, Amazon.com Inc., Alibaba Group Holding Ltd. and other such digital companies that derive considerable value from a large user base in India.

While the main legal provision was introduced in 2018, the revenue department notified the thresholds for the purposes of significant economic presence (SEP) on May 3. Experts BloombergQuint spoke with said the move was surprising.

In her budget speech last year, Finance Minister Nirmala Sitharaman had said SEP provisions are being deferred given that the G-20 OECD report on digital economy is expected by December 2020, according to Shefali Goradia, partner at Deloitte India.

The OECD is yet to reach consensus on taxation on digital economy. Their report is expected this year but the CBDT has now gone ahead and notified the thresholds for significant economic presence.
Shefali Goradia, Partner, Deloitte India

Curious timing apart, the concept was introduced via Finance Act, 2018, to enlarge the scope of income of non-residents that accrues or arises in India, by establishing a “business connection” of the foreign entities.

At the time, the government had articulated its intent that it should get its fair share of tax from business-to-consumer transactions. The idea is to tax profits of those online and offline businesses that don’t have a physical presence in India but derive significant economic value from the country.

Soon after, the Central Board of Direct Taxes floated a consultation paper seeking views on thresholds that should be applied to bring such businesses within the tax net.

The department has now notified those:

  • Transaction Threshold: Any non-resident whose revenue exceeds Rs 2 crore for transactions in respect of goods, services or property with any person in India. This will include transactions on download of data or software.
  • User Threshold: Any entity that systematically and continuously does business with more than 3 lakh users in India.

The threshold is very low and should have been a little reasonably set, Ajay Rotti, partner at Dhruva Advisors, pointed out. “Given the Indian e-commerce market and the current situation, even smaller players will have more users than this.”

In short, once an overseas entity hits either this transaction threshold or the number of users, it’ll be seen as an entity that has business presence in India.

To be clear, only those entities will get impacted by the SEP provisions who come from non-treaty jurisdictions. That’s because the treaties specify non-resident entities will come under the tax net only if they have a permanent establishment in India. Permanent establishment is, in tax parlance, a fixed place of business. India currently has a Double Taxation Avoidance Agreement with 97 countries, including the U.S., U.K., Australia, Netherlands, among others.

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