EXECUTIVE SUMMARY

The Central Board of Direct Taxes (CBDT) has notified the thresholds under the rules applicable for digital taxation on 3 May 2021. These thresholds clarify the applicability of Significant Economic Presence (SEP) in terms of Section 9 of the Income-tax Act, 1961 (IT Act), which provisions seek to enlarge the scope of income of non-residents that accrues or arises in India, by establishing a business connection in India.

BACKGROUND

The Organisation for Economic Cooperation and Development (OECD) had initiated the Base Erosion and Profit Shifting project and proposed the concepts of equalisation levy and SEP, in order to address the taxation of cross-border digital transactions, which typically do not come within the ambit of traditional taxation. The Government of India introduced the concept of equalisation levy in the Finance Act, 2016 and subsequently amended and enhanced its scope to include e-commerce operators.

EQUALISATION LEVY

In India, the equalisation levy has been applicable to certain non-resident businesses and the rate of taxation fixed at 6% for specified services such as online advertisements. The Finance Act, 2020 then expanded the scope of the equalisation levy to include consideration received or receivable by e-commerce operators from e-commerce supply or services at a rate of 2%. This is however subject to applicable exemptions, as set out hereafter.

The following equalisation levies are in force in India –

a) 6% equalisation levy is charged on services for the purpose of online advertisement (specified services) rendered by a non-resident to an Indian resident or a non-resident with permanent establishment in India.

b) 2% equalisation levy is charged on consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it to a person in India or using an Indian Internet Protocol (IP) address, or to a non-resident in “specified circumstances”, such as sale of advertisement targeted to an Indian customer/customer using Indian IP address or sale of data from a person who is resident in India or through a person who uses an Indian IP address.

The 2% equalisation levy does not apply to a non-resident having an Indian permanent establishment or paying income tax in India or where the turnover of the e-commerce operator is less than INR 20,000,000 in the previous year.

SEP PROVISIONS AND THE NOTIFIED RULES

The amendment to Section 9 of the IT Act was carried out through the Finance Act 2018, which introduced the principle of SEP. The intent was to tax those businesses that do not have a physical presence in India but derive significant economic value in India. This amendment widened the scope of ‘business connection’ to include provisions concerning transactions in respect of goods, services or property carried out by person resident outside India with any person in India including provisions concerning download of data or software in India, if aggregate payments from such transactions exceed a prescribed amount or systematic business activities or engagement with users in India exceeded prescribed thresholds.

On 3 May 2021, the CBDT has notified the following thresholds, applicable from 1 April 2022:

a) Transaction Threshold – Any non-resident whose turnover exceeds INR 20,000,000 for transactions in respect of goods, services or property with any person in India and will include transactions of download of data or software.

b) User Threshold – The number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be 300,000.

IMPACT OF THE NOTIFICATION

It is pertinent to note that this equalisation levy may only be applicable to non-treaty jurisdictions, and such non-residents not eligible for treaty benefit may accordingly need to review their taxability. India currently has comprehensive treaties with countries such as USA, UK and Australia to avoid double taxation. In order for the equalisation levy to be applicable, the existing treaties would have to be re-negotiated, as current double tax avoidance treaties are premised on the conventional concept of ‘permanent establishment’, which only takes into account the physical presence of an assessee. While the consensus-based and multilateral OECD rules are expected to provide more clarity and guidance on cross-border taxation of digital transactions, a number of countries, including France, Singapore, Malaysia and India have in the interim introduced unilateral measures to tax such cross-border digital transactions.

The current notified thresholds do appear to be very low and will potentially tax a number of non-resident small and medium businesses. Stakeholders and industry will expect the Government to clarify the applicability of this levy, in line with the OECD guidance, expected later this year.