Non-residents are subject to tax in India with respect to the income accrued/ deemed to accrue in India or received/ deemed to be received in India as per the provisions of the Income Tax Act, 1961 (‘Act’).
While the international tax landscape is seeing a lot of changes in form of OECD BEPS Pillar 1 & 2 to tax the digital economy, Global minimum tax rate to plug-in tax loss, Multilateral instruments (MLI) to amend the treaties in the light of BEPS, etc. and India has also been very active in bringing change to the domestic laws to protect its share of tax revenue as well as avoid tax evasion. A few of the changes made in the past few years include the equalization levy, the concept of significant economic presence (‘SEP’), General Anti Avoidance Rules, etc.
The concept of SEP was introduced vide Finance Act 2018 but owing to delay in its enforcement, the same was omitted and re-introduced vide Finance Act 2020. Recently the CBDT has notified the prescribed rules specifying the threshold for SEP and the provisions becoming effective from 01 April 2022 (i.e. AY 2022-23). Basis the provisions of SEP under the Act read with the rules, the following shall constitute a SEP for non-residents:
- transaction in respect of any goods, services, or property carried out by a non-resident with any person in India including the 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 [i.e. INR 2 crores]
- systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed [i.e. 3 lakh users], in India
It has been further clarified that the SEP shall not be affected by the place of entering the agreement for such transactions or non-resident has residence/ place of business in India or non-resident renders service in India.
Therefore, it may be noted that the scope of SEP is quite wide as per the provisions of the Act and shall lead to SEP in India for a lot of non-residents satisfying the aforementioned conditions. However, in case India has entered into DTAA with the country of residence of the non-residents, then the treaty benefit may be availed. Hence, in cases where there is no Permanent establishment (‘PE’) in India as per the treaty, then the said income shall be exempt from taxation subject to fulfillment of conditions prescribed under Section 90 of the Act such as furnishing of Tax Residency Certificate, no PE declaration, Form 10F, etc.
Though such income becomes exempt on account of the treaty benefit, it may not absolve both payer in India and payee (non-resident) from the other provisions and they may be required to undertake the following compliances:
1. Furnishing of Form 15CA/CB by the Payer – the entity making payments to non-residents is required to withhold taxes as per the provisions of Section 195 of the Act. Further on perusal of Rule 37BB, it shall be required to furnish Form 15CA/CB to remit the said amount to non-residents even though the non-residents may claim that said amount is exempt from tax (due to treaty benefit) and hence does not require any withholding but the remittance of such amount shall require Form 15CA/CB considering that the exemption to furnish the payment under rule 37BB(3) is provided when the said amount is not chargeable to tax under the provisions of the Act.
2. Furnishing of Return of Income – The non-resident having taxable income as per the provisions of the Act, however, the same is exempt due to the treaty benefit may be required to file an Income Tax return as per the provisions of the Act. The said view is also supported by the AAR rulings in the case of VNU International BV [AAR No. 871 Of 2010] and Castleton Investment Ltd [AAR No. 999 Of 2010]. For the purpose of filing of return of income, the non-resident shall be required to obtain the PAN as well.
The non-filing of return may also lead to consequences such as late filing fees and initiation of penalty proceedings basis the non-compliances under the Act. Owing to the burden of additional compliances that may be required by the non-residents, CBDT may provide further clarification in this regard or may consider increasing the thresholds so as to support the initiative of ease of doing business. Apart from the above, the impact of equalization levy (‘EL’) shall have to be evaluated and in case the same is subject to EL then such receipts shall be exempt as per the provisions of Section 10(50) the Act.
FAQs
Q.1 Whether the non-resident selling goods or providing services in India be subject to SEP?
Basis the provisions of the Act and rules thereunder, it is very likely that the non-residents shall be construed to have SEP if the thresholds discussed above are breached, thereby increasing the burden of non-residents having a transaction with persons operating in India.
Q.2 In case the business income becomes taxable in India then what shall be the rate for tax purposes?
For the foreign company, the tax rate shall be 40% plus surcharge and cess, for individuals the same shall be as per the slab rate specified. The withholding shall also be done basis, the said tax rates by the payer.
Q.3 If the services are subject to EL, then return filing shall be required u/s 139(1)?
No, a view may be taken that the income being exempt as per the provisions of the Act and return filing obligation may not arise for the non-residents. EL has an overriding effect and therefore, in case EL is levied then other provisions of the Act may not apply.
Also, in such a case the income is considered exempt under the Act then 15CA/CB may not be required if payments fall in the nature as specified under Rule 37BB(3), else Part D of 15CA may be required.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion/ advice or recommendation and the content is to be used strictly for educative purposes only.
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