International Tax Regulations have become increasingly complicated and intricate given the fact that we no longer have borders as far as financial transactions are concerned. Yes, physical borders still exist but imagine operating on the World Wide Web and conducting transactions across the world. For all you know, a software developer situated in India could be providing coding services and software to a client in Alaska, the USA,\ or vice versa. The question automatically arises – who has jurisdiction over such a transaction? Which country has the right to tax?
Tax challenges posed by digital transactions have been fiercely debated over the last two decades both domestically and on international forums, given India’s significant presence in the digital space. The OECD’s BEPS (Base Erosion & Profit Sharing) report published in 2015 attempted to address various options of taxing digital transactions. It was therefore only a matter of time, before India came out with revisions to its tax laws to address the challenges of the digital economy.
Traditionally, India’s regulations under section 9(1)(i) of the IT Act, specify that an income is deemed to accrue or arise in India if it accrues or arises, directly or indirectly, through or from any “business connection” in India. Explanation 2 to that section defines “business connection” to include business activities carried out through a person who, acting on behalf of the non-resident, habitually exercises an authority to conclude contracts in India on behalf of the non-resident, or habitually maintains in India a stock of goods or merchandise, or habitually secures orders in India for the non-resident. The 2018 budget lowered this threshold so as to bring digital transactions into its domain or under its purview. As a result, from the next financial year (starting April 1, 2019) profits of a foreign company would be taxed in India if the company had a “significant economic presence” in India. Obviously, the next question would be what constitutes significant economic presence?
The Finance Bill, 2018 noted that a foreign company shall be said to have a “significant economic presence” in India if: (a) transaction in respect of any goods, services or property carried out by a non-resident 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 such amount as may be prescribed; or (b) 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:…
This was obviously vague, ambiguous, and inefficient from the point of view of implementation. On 3rd May 2021, the CBDT finally notified a threshold for SEP which will come into effect from 1st April 2022. According to the notification issued in the official gazette by CBDT, Ministry of Finance:
- The number of aggregate payments arising from the transaction(s) in respect of any goods, services, or property carried out by a non-resident with any person resident in India, including the provision of download of data/ software in India during the year shall be Rs. 2 crores (approximately USD 2,71,000/-);
- The number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be 3 lakhs.
While this effectively removes ambiguity, there are still some concerns such as the thresholds being very low and implications of applicability to existing DTAAs. Will we need to renegotiate the existing DTAAs? How will benefits work until the DTAAs can be suitably modified? Questions such as these and more remain unanswered.