Until date, non-resident businesses doing business in India
and having commercial relationships in India were exempt from the Indian tax
system due to the taxing regulations outlined in Article 7 of the Double Tax
Avoidance Agreement. There was no such provision that allowed the Indian
government to collect taxes from abroad corporations that did not have a
permanent establishment in India due to taxing restrictions outlined in Article
7 of the Double Taxation Avoidance Agreement. According to the DTAA, a
corporation will be subject to Indian taxation only if it has a permanent
establishment in India.
The Central Board of Direct Taxes introduced the “Threshold
for the Purpose of Significant Economic Presence” under Income Tax Rules, 2021
on May 3, 2021, by Notification No. 41 /2021/ F. No. 370142/11/2018-TPL.
Companies who have no physical presence in India but have reaped considerable
financial benefits from the Indian market will now be subject to the Indian tax
system.
What is DTAA?
The Double Tax Avoidance Agreement (DTAA) is a treaty signed
between governments to avoid paying double taxation on the same income.
Overseas corporations typically start their operations in different nations
without having permanent presence there. The primary goal of this agreement is
to promote globalization by eliminating double taxation.
With the advancement of technology in recent decades, organizations
have begun a substantial quantity of business and earned a large fortune by
having a permanent establishment.
What is “SEP”?
The
Finance Act was revised in 2020, and Explanation 2A of Section 9 of the
Income-tax Act was replaced, and the following was added- For the removal of doubts, it is hereby declared that the
significant economic presence of a non-resident in India shall constitute
“business connection” in India and “significant economic presence” for this
purpose, shall mean
1.
any transaction in
respect of any goods, services or property carried out by a nonresident in
India including provision of download of data or software in India if the
aggregate of payments arising from such transaction or transactions during the
previous year exceeds the amount as may be prescribed; or
2.
Systematic and
continuous soliciting of its business activities or engaging in interaction
with such number of users as may be prescribed, in India through digital means.
The amendment also cleared that even if following condition
are not fulfilled, the Significant Economic Presence will be acknowledged-
A.
the agreement for such
transactions or activities is entered in India; or
B.
the non-resident has a
residence or place of business in India; or
C.
the non-resident
renders services in India
The Explanation 3A was inserted to clear any doubt
regarding the scope of income which will be included in the “Income
attributable to the operations carried out in India” i.e,
A.
such advertisement
which targets a customer who resides in India or a customer who accesses the
advertisement through internet protocol address located in India;
B.
sale of data collected
from a person who resides in India or from a person who uses internet protocol
address located in India; and
C.
sale of goods or
services using data collected from a person who resides in India or from a
person who uses internet protocol address located in India.”.
Now, the companies, which has the amount of aggregate of
payments arising from transaction or transactions has to be two crore rupees
and three lakhs users, will have to pay 2% digital tax or Equalization Levy
and will come into force from April, 2022.
Stand of data after introduction
of ‘Threshold of SEP’
After considering public feedback, India decided to keep the
recommended threshold low, with the total amount of payments being two crores
and the number of uses being three lakhs.
India has now implemented SEP and passed the criterion for Significant Economic Presence. The Indian government will have to renegotiate the “Double Tax Avoidance Agreement” with the countries. Because if the agreements are not renegotiated, corporations may face double taxation, which would be a complete violation of the "Double Tax Avoidance Agreement." It will be difficult for the government because large corporations have already begun to meet with their home countries in order to dodge the Digital Tax in India.
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All the best!