In order to address the problem of Base Erosion and Profit Shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) framed various Action Plans. BEPS Action Plan 1 suggested measures to addresses the challenges posed by the Digital Economy. Taking a cue from this Action Plan, India has been a front runner in implementing measures viz., Equalisation Levy (EL) and Significant Economic Presence (SEP).
While the provisions pertaining to SEP were introduced in 2018, Finance Act, 2020 has substituted the said provisions. Further, for the purpose of attracting SEP provisions, a threshold was to be prescribed. Recently, the Central Board of Direct Taxes (CBDT) has issued a Notification1 notifying the threshold for the purpose of applying SEP provision.
We, at BDO in India, have summarised this Notification and provided our comments on its impact hereunder:
What is SEP?
As per Explanation 2A to section 9(1)(i) of the Income-tax Act, 1961 (IT Act), SEP of a non-resident in India shall constitute business connection in India. For this purpose, the SEP means:
a. Transaction 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, if the aggregate of payments arising from such transaction or transactions during the fiscal year exceeds such amount as may be prescribed; or
b. Systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed.
Are the criteria cumulative?
No. The SEP provision could get attracted even if one of the criteria is satisfied.
What are the thresholds prescribed?
Notification1 has inserted new Rule 11UD in the Income-tax Rules, 1962 (IT Rules) to provide following thresholds:
- INR 20 million for criteria covered by (a) above; and
- 3 lakhs users for criteria covered by (b) above
From when will the Rule 11UD of the IT Rule be applicable?
The new Rule 11UD of the IT Rules shall come into effect from 1 April 2022.
With the prescribing of threshold, the SEP provisions are now applicable to all the non-residents satisfying the criteria. However, no change is made in the Double Taxation Avoidance Agreement (Tax Treaty) entered by India. It is pertinent to note that the definition of Permanent Establishment contained in most of the Tax Treaties does not capture SEP. Thus, while SEP provision will not get attracted to a non-resident who is a tax resident of a Tax Treaty country, it could get attracted if either he is not entitled to access the Tax Treaty or he is from a non-tax treaty country.
Also, the amended provisions of SEP are applicable from fiscal year 2021-22 whereas the Rule is applicable from 1 April 2022. Thus, one needs to analyse the applicability of SEP provision for the fiscal year 2021-22.
It is also pertinent to note that the threshold of INR 20 million is also provided for applicability of EL 2.02. As EL 2.0 is attracted to online sale of goods and / or online provision of services, there is a possibility of EL and SEP provision overlapping. However, in light of section 10(50) of the IT Act, one could contend that as EL 2.0 is levied on the transaction, the income attributable to SEP should not be taxed.
Some of the other aspects which could arise are – how to track the users in India as the access / purchase could be made by non-residents who are visiting for leisure purpose; how will the threshold limit of 3 lakh users be computed? Once the SEP is established, what will be the key / basis for allocating the profits? Also, what constitutes systematic and continuous soliciting of business as these terms have not been defined in the IT Act.
While the CBDT has notified the Rule prescribing the threshold limit, it is silent on how the profit attribution would be done. Further, it has also not clarified whether SEP will bring within its ambit all activities irrespective of whether it is a revenue generating activity or not?
1Notification No 41/2021/F. No. 370142/11/2018-TPL
2EL 2.0 is levied on online sale of goods or online provision of services or a combination of both, by non-resident e-commerce operators, when online sale is made by a non-resident to the specified person. The threshold prescribed for applicability of EL 2.0 is INR 20 million.