SEP was introduced in the Income-Tax Act, 1961 (‘ITA’) from April 1, 2018
It expands the scope of income of a non-resident which accrues or arises in India that results in a ‘business connection’ in India for that non-resident. The resulting income, attributable to the SEP, is taxable
SEP is defined to mean:
Transaction in respect of any goods, services or property carried out by a non-resident in India, including the provision of download of data or software in India, subject to payment threshold to be
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
While introducing the concept of SEP the threshold beyond which the transactions were to be taxed was yet to be determined which is now determined by government
The threshold is now as below
“…the amount of aggregate of payments arising from transaction, or transactions of goods, services or property carried out by a non-resident, with any person in India…including download of data or software in India during the previous year, shall be Rs 2 crore…the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakh,
Effective from: 1st April 2022
• India’s existing treaties contain the conventional concept of permanent establishment (PE) for taxing business profits of a non-resident and the inclusion of SEP in the ITA will not be read into the tax treaties unless they are amended.
• Revenues and users not exceeding thresholds as may be prescribed, to remain outside scope of SEP
Who will be impacted
• Non-resident carrying on specified activities beyond thresholds as is now prescribed
• Non-residents who do not have tax treaty benefits are directly impacted
Illustrations of transactions impacted
• Sale or purchase of goods, services or property through digital means
• Any transaction involving download of data or software in India (like in-app purchases)
• Provision of online training / gaming services
• Provision of services of streaming of e-content (audio / video)
• Websites, online database, cloud storage and computing services, with significant user base in India (now defined as 2 lakh users)
Position for existing treaties
As long as the old treaties continue they have concept of traditional PE where such unilateral amendment of Act by India will have no meaning since companies will take benefit of traditional definition of PE as defined in existing treaties. However countries with which India have no treaty will be impacted by this .
Unless consensus is reached on the multilateral solution with regards to taxation of digital economy under OECD which is being deliberated where all tax treaties get amended automatically the traditional PE will still prevail. The consensus was expected by 2020 but due to reasons of Covid it has been delayed and is now expected by end of 2021.Until then countries are going the route of amending their domestic acts so as to get some share of revenue for such transactions.
There was definitely need to revise laws and which was felt world over which is the reason that the whole concept of BEPS action plan was laid down by OECD. Amendment in Act is also required since MLI will only survive if Act has been amended in order to avoid harmful tax practices. However While framing tax treaties one aspect which is considered is to enhance the trade relations between countries Which is why to keep threshold so low is where finance ministry is a bit too aggressive. Finance ministry could have thought of a higher limit and also to wait until the consensus was reached globally about method of taxation of such transactions after which Companies could not even take shelter of treaty if MLI was signed. As it stands now companies can easily take shelter of existing tax treaties where concept of traditional PE is still prevalent.
CA Vishal Mehta