Taxation in India of Digital Businesses by Non Residents

Update based on the PIB Press Release dated 12-Feb-2019.

To address the challenges posed by the Non Resident enterprises  conducting their business through digital means in the India remotely, the following measures have been taken under the existing law:

1. EQUALISATION LEVY -

a)  A new levy viz. 'Equalisation Levy' was introduced by the Finance Act, 2016 for taxation of the digital economy based on OECD Base Erosion and Profit Shifting (BEPS) suggested measures.

b)  Presently, the levy is charged @ 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India, where the aggregate amount of such consideration exceeds one lakh rupees (Rs.100000) in a previous year.

c)   The Equalization Levy tax collection exceeded Rs. 550 crore for FY 2017-18.

2. “Significant Economic Presence” OF NON RESIDENTS IN INDIA-

a) Section 9(1)(i) of the Income-tax Act, 1961 as amended introduced the concept of "Significant Economic Presence" (SEP) for establishing "business connection" in the case of non-resident in India. Accordingly, significant economic presence shall mean–

		Based on Amount: Any 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 the amount as may be prescribed; or
		Based on number of Interactions: 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.

(Suggestions/comments of stakeholders and the general public are invited to prescribe the thresholds to establish SEP of a non-resident in India )

3. GAAR Applicability: If digital businesses operated by non-residents are structured to artificially avoid establishment of a "business connection" or "permanent establishment" in India, including by way of claiming the activities carried out in India to be preparatory or auxiliary in nature, the GAAR provisions under the Income-tax Act may become applicable to the income of such digital businesses in India.

4. TAX based on significant economic presence (SEP) on non residents’ income earned by digital businesses IN DTAA & NON DTAA JURISDICTION-

i.  If India does not have DTAA - Tax is expected to increase tax collection by establishing business connection .

ii. If India already has a  DTAA - However if Non resident operating out of jurisdictions with which India already has a DTAA, Tax based on SEP will only be effective after renegotiation of such DTAA which will be based on international consensus.