Section 9(1)(i) of the Income Tax Act, 1961 was amended vide Finance Act 2018 to bring in the concept of “Significant Economic Presence” (‘SEP’) for establishing a business connection in India of a non-resident. According to the said Section, “significant economic presence” for this purpose shall mean:
- “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
- 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:..”
It further provided that the transactions or activities shall constitute a significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India or agreement for such transactions/ activities entered in India.
The provision of SEP enlarges the scope of income of non-residents by establishing the business connection of non-residents in India. However, since thresholds were not notified since the introduction of SEP provision, practically the provision remained inoperative.
Finally, on 03rd May 2021, The Central Board of Direct Taxes (‘CBDT) vide G.S.R. 314(E) notified a threshold for SEP. This will come into effect from the 01st April 2022. According to the notification issued in the official gazette by CBDT, Ministry of Finance:
- The amount 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.
Few noteworthy points:
- The threshold of aggregate payment of Rs. 2 crores and user base of 3 lakhs seems quite low considering the user base in India of few e-commerce giants such as Facebook or Google.
- Existing DTAAs will not cover the proposed change unless DTAAs are re-negotiated. Accordingly, non-resident of the treaty jurisdiction can take recourse to the beneficial provision of DTAA. Consequently, the relevance of the amendment may be restricted till the time treaty benefit is available.
- However, non-resident of a non-treaty jurisdiction may need to assess the impact.
- The interplay between Equalisation Levy and SEP needs to be looked into when both the provision are in force parallelly.