One such resolution was provided by Organisation for Economic Co-operation and Development (OECD) below Base Erosion and Profit Shifting (BEPS) Action Plan 1. This Action Plan beneficial three interim choices to deal with the tax challenges arising from digital financial system until a worldwide consensus is reached to deal with this challenge. These choices had been:
* Significant financial presence (SEP);
* Withholding tax on digital transactions; and
* Equalization levy
After these developments, a number of international locations have taken unilateral steps and made obligatory modifications of their home legal guidelines to tax new-age companies.
India: the early mover
India was one of many early movers on this course. The Central Board of Direct taxes (CBDT), the apex tax administrative physique in India arrange a committee on taxation of e-commerce to guage the choices out there. The committee beneficial equalization levy as a viable possibility for India, because it didn’t require alternation within the present tax treaties, which might have been a tedious and time-consuming course of. Thus, India grew to become one of many first international locations to levy equalization levy of 6% on internet marketing and associated companies in 2016. The equalization levy provisions had been considerably widened in 2020 by bringing in its ambit the net sale of products and companies.
The committee was additionally of the view that idea of SEP may very well be launched throughout the idea of “enterprise connection”. Under Indian domestic tax law, a non-resident is taxed in India if it has a “business connection” in India. BEPS Action Plan 1 had beneficial {that a} non-resident enterprise would create a taxable presence in a rustic if it has a SEP in that nation on the premise of things which have a purposeful and sustained interplay with the financial system by assistance from expertise and different automated instruments.
Advent of SEP provisions
In this backdrop, the SEP provisions had been initially launched in 2018. It was felt that this alteration within the home legislation will allow India to barter for inclusion of this new nexus rule within the tax treaties. These provisions, nevertheless, remained inoperative because the thresholds weren’t prescribed.
The present SEP provisions are relevant from 2021-22. As per the present provisions, a non-resident having SEP in India shall be deemed to have a enterprise connection in India. Accordingly, revenue attributable to the transactions or actions referred to in these provisions shall be deemed to accrue or come up in India and therefore taxable in India.
SEP of a non-resident can be established if:
* the combination of funds arising from transactions in respect of any items, companies or property carried out by a non-resident with any individual in India together with provision of obtain of knowledge or software program in India, in the course of the monetary yr exceeds `20 million (throughout a monetary yr); or
* Non-resident undertakes systematic and steady soliciting of enterprise actions or engages in interplay with 300,000 or extra variety of customers in India.
SEP provisions can be relevant, no matter whether or not:
* Agreement for such transactions or actions is entered in India; or
* Non-resident has a residence or office in India; or
* Non-resident renders companies in India.
It has additionally been clarified that revenue attributable to the operations carried out in India, shall embrace revenue from:
* commercial which targets a buyer who resides in India or a buyer who accesses the commercial by web protocol handle positioned in India;
* sale of knowledge collected from an individual who resides in India or from an individual who makes use of web protocol handle positioned in India; and
* sale of products or companies utilizing information collected from an individual who resides in India or from an individual who makes use of web protocol handle positioned in India.
Treaty safety
It is vital to notice that the idea of SEP has been launched within the Indian home tax legislation. As far because the tax treaties are involved, they supply that enterprise income of a non-resident can be taxable in India provided that the non-resident has a everlasting institution (PE) in India. Under the tax treaties, the PE provisions, basically, would get triggered foundation some bodily presence of an entity. For instance, having an workplace or bodily presence of workers exceeding specified variety of days and many others. Therefore, non-residents who’re entitled to say treaty profit would prima facie not be impacted by the SEP provisions, contemplating that the scope of PE in tax treaties continues to be a lot narrower.
SEP provisions would, nevertheless, be related in instances the place tax treaty profit isn’t out there. This might cowl taxpayers based mostly in jurisdictions with whom India doesn’t have a tax treaty.
It would additionally embrace taxpayers from international locations the place India has a tax treaty in pressure, however the treaty profit isn’t out there. The causes for non-availability of treaty profit may very well be a number of. These might vary from the taxpayer not qualifying as ‘person’ or a ‘resident’ below the treaty as a result of its entity sort, or applicability of anti-avoidance provisions equivalent to General Avoidance Rule (GAAR) below the home legislation or Principal Purpose Test (PPT) below the tax treaty.
Equalization levy vs SEP
Currently, the equalization levy provisions and SEP provisions co-exist within the Indian home legal guidelines. Hence, it’s doable that there may very well be an overlap between the 2. It has, nevertheless, been offered that if a transaction is topic to equalization levy, then there can be no additional Indian revenue tax legal responsibility. Accordingly, non-residents would wish to verify if equalization levy provisions are relevant within the first occasion. If these provisions are relevant, then the transaction must be outdoors the purview of SEP provisions. Broadly talking, equalization levy provisions reign supreme.
Stakeholders’ issues
Stakeholders have identified that the thresholds offered for SEP are fairly low and must be reconsidered. It has additionally been highlighted that although the intent was to tax digital companies, its provisions appear to be way more expansive. Further, which means of key phrases equivalent to “systematic”, “continuous”, or “soliciting” has not been offered which can result in litigation on scope of the provisions. There are issues on how the variety of customers will likely be decided, contemplating they don’t seem to be restricted to residents.
On the sensible facet, taxpayers would wish to observe if the SEP provisions are triggered in case of non-resident payee, in order that applicable taxes are withheld.
Way ahead
Considering the latest G7, G20/OECD developments to reach a consensus-based resolution on new worldwide tax rules, one must wait and watch to see the influence, if any on the home SEP and equalization levy provisions. This is contemplating that India must realign its home tax legal guidelines based mostly on the worldwide resolution, to which it has prima facie prolonged its help. Indeed, it will likely be an attention-grabbing play to observe as issues unfold in close to future.
Richa Sawhney and Ankita Chowdhry contributed to this text
Vikas Vasal is nationwide managing partner-tax at Grant Thornton Bharat.
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