Under the “Business Connection”– new Explanation 2A to Sec.9(1)(1) of the Income Tax Act , there is an insertion for business activities carried out by a non-resident which create “significant economic presence” whether or not the non-resident has a residence or place of business in India or renders services in India. If the non-resident continues to maintain a purposeful and sustained interaction by use of technologically automated tools and generates revenue, then the same shall be treated as a nexus to such incomes earned in India.
1) Any transaction carried out by a Non-resident in India in respect of goods, services or property including provision of download of data or software in India, if the aggregate value of the payments exceeds the prescribed threshold
2) Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means
The taxability shall be “such income “as is attributable to such transactions or activities and be deemed to accrue or arise in India.
India is one of the first movers of such digital PE taxation and is setting up precedence in the International Taxation. It might be a rightful move for the Indian Government to capitalize on the consumer base and get a share of the profits swept by the non-resident players exploiting the huge consumption market base.
BEPS Action Plan 1 in October 2015 discussed at length about the methods of taxation for digital economy, but could not arrive at a consensus. Action Plan 7 recommended to review the definition of PE which circumvents the existing PE definition under preparatory or auxiliary activities or commissionaire arrangements or fragmentation of business activities. It suggested introduction of an anti-fragmentation rule to prevent the taxpayers from resorting to tax exemption under Article 5(4) of DTAAs.
India being a signatory to Multi-lateral instruments (MLI) has reserved its right under Article 5 not to apply to its covered tax agreements. India prefers use of credit method (Article 23B of the Model Convention).
Section 90 of the Income-tax Act, 1961 states that Domestic tax law will apply to the extent it is more beneficial than the DTAA. Now that, India has amended its Domestic Law to include taxation based on economic significance through digital means, happening in India from outside the country, its tax treaties under Article 5(5) being modified automatically based on MLI arrangement shall stand effective.
Author- Vasan MS, Sr. Vice President – Global Taxation, Hinduja Global Solutions
(The article is the author’s personal view.)