The implementation of the concept of ‘Significant Economic Presence’ (SEP) in the Indian Income tax law is yet another landmark step taken by the Indian tax authority in their tryst to lay claim to what they feel is their fair share of the burgeoning revenues of technology companies such as Amazon, Netflix, Google, Microsoft – most of whom are located overseas.
Indian lawmakers have created scenarios where such foreign corporations are deemed to have “business connection” in India, thus bringing their Indian operations within the ambit of the Indian tax system. In the Finance Act, 2018, the Indian income tax law was amended to widen the scope of the existing term ‘business connection’ to include SEP.
What is SEP?
SEP was defined to mean, inter-alia, transaction of goods and services with any person in India, including provision of download of data or software in India, if one of two conditions are satisfied:
(1) the aggregate of payments arising from such transactions exceeds a specified limit, or
(2) the engagement with Indian consumers exceeds a specified number.
To be fair on its part, India did wait for a couple of years to specify what those numbers were, so as to activate the provision. The official position was to let a consensus develop (lest trade disputes should arise) amongst OECD nations (where most of the tech-giants are headquartered), which was to come by end of December 2020. But that didn’t come by.
So, India went ahead and specified the threshold limits in May 2021 (effective April 1, 2021) to operationalise the SEP for non-resident e-commerce companies by including ‘download of data or software’ worth revenues exceeding ₹2 crore from Indians or a threshold of 3 lakh number of Indian users with whom such companies ‘solicit systematic and continuous business activities or engage in interaction’.
Points of interest
The first is that how will the Indian taxman implement the concept in practice? How will the data required be gathered? And even if it is gathered, how will the same be verified?
I feel that this framework is a gaping hole!
Most of the terms used in defining SEP for services have not been defined. For instance, how do you define systematic and continuous soliciting of business or engaging in interactions? The biggest legal stumbling blocks that I envisage are the heralding of protracted litigation given the grey areas in interpretation and the (in)ability of the Indian regime to enforce tax collection from non-resident tech corporates.
The second legal point that merits attention notice is that whilst India has amended the domestic law for SEP, the bilateral double taxation avoidance treaties that India has signed remain unaltered. Until such a time, taxing the foreign tech giants in India could still be a mirage. But, the legal significance of India’s action is to convey an important message to stakeholders – India is getting impatient and wants this vexed tax issue to be addressed soon. Are the stakeholders listening?
(The author is Partner, Bhuta Shah & Co. LLP, a law firm)