India notifies digital tax threshold of Rs 2 crore and 300,000 users

 

India on Monday notified a revenue threshold of Rs 2 crore and a limit of 300,000 users for non-resident technology firms such as Google, Facebook, Netflix, to pay tax in India under new or revised bilateral tax pacts.

This is part of the Significant Economic Presence (SEP) principle, which was introduced in the Finance Bill 2018-19, and which widened the scope of ‘business connection’ to include provision of download of data or software, if aggregate payments from such transactions exceed a prescribed amount, or if a multinational's interaction is with a prescribed number of users.

“…the amount of aggregate of payments arising from transaction, or transactions of goods, services or property carried out by a non-resident, with any person in India…including download of data or software in India during the previous year, shall be Rs 2 crore…the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakh,” said the notification issued by the ministry of finance.

This will come into effect from April 1, 2022.

However, the existing double taxation avoidance agreements will not be covered under the proposed change, implying that in order to tax Facebook, Google and the like, India will require to renegotiate the tax treaty with the US.

The digital companies will come under India’s tax net only when the existing treaties get reviewed or when new ones are signed.

“Considering that the threshold has been kept quite low, many non-residents would come under the ambit of SEP. However, a non-resident can still take shelter under the tax treaties since India’s existing treaties contain the conventional concept of permanent establishment (PE) for taxing business profits of a non-resident and the inclusion of SEP in the Act will not be read into the tax treaties unless they are amended,” said Rakesh Nangia, managing partner, Nangia Anderson LLP. "Though the residents of treaty countries can claim the beneficial provisions of treaty, non-treaty jurisdictions and non-residents not eligible for treaty benefit, may have to review their position on taxability and compliances," he added.