Significant Economic Presence for E-Commerce Taxation

This is a concept raised in the BEPS Action 1 Report on E-commerce taxation. Of course, it is already being used by some states within USA for their cross-state indirect taxes. It is being strongly promoted by the European Union. However, US Government is strongly opposed to any kind of E-commerce Income-tax under the OECD Model of DTA. Hence so far, there is no provision for E-commerce taxation under the DTA. 

An explanation of the concept of SEP: 

Article 7 of the DTA provides that the non-resident assessee is not liable to tax in the country of sales unless he has a PE in the Country of sales. Primarily, a PE requires a fixed place of business within the geographical boundaries of the country of sales. Modern technology has made it possible for many companies to do business in several countries without PE. Phrases like “Borderless world” and “Modern technology defies Geography” have become reality for E-Commerce. But governments do want to collect income tax based on geography. Several Governments are now claiming a right to tax a NR’s income based on sale of goods & services within their countries. They need a concept of a PE without fixed place of business. An SEP would be a PE not requiring the fixed place of business. 

If there is no fixed place of business, then on what grounds (nexus) a non-resident may be taxed for its business income? Which other nexus may be used to bring the NR in tax net? This is the crucial matter of definition of SEP. BEPS Action 1 Report gives several different criteria which may be considered for considering an SEP. The criteria adopted by Indian Government under SEP definition are discussed below: S.9 (1) (i) Explanation 2A: A NR will be considered to have an SEP in India –

(a) If the non-resident receives revenue exceeding an amount to be prescribed; for transactions carried on by the NR within India,                                        

OR

(b) (i) If the non-resident systematically and continuously solicits business in India through digital means;

(b) (ii) If the non-resident engages in interaction with users in India through digital means. The minimum number of users that would attract the provision of SEP will be prescribed by notification. 

1. Equalisation Levy (EQL) & Significant Economic Presence (SEP): 

Equalisation Levy has been imposed as an E-commerce tax by Chapter VIII, Sections 163 to 180 of The Finance Act, 2016. No change has been proposed under Finance Bill, 2018 on Equalisation Levy.

With introduction of Significant Economic Presence (SEP) in ITA & continuation of EQL under Finance Act, 2016; there will be an overlap. If a NR earns advertising revenue from India, he will be liable to which tax?

(i) Any income which is chargeable to EQL is exempt from Indian Income-tax u/s. 10 (50). Hence there will be no double tax.

Can such an assessee choose to be taxed under ITA instead of EQL? No. Finance Act, 2016 chapter VIII does not give any option to the assessee. If he is liable to tax under EQL, he has to pay tax as EQL & get exemption under ITA.

(ii) Many revenues will be covered under the definition of SEP &are not covered under EQL. Such revenues will not get exemption u/s. 10 (50). What will be their tax exposure?

There can be two possibilities. Such assessee is entitled to DTA relief because he is resident of a country with which India has DTA; and the assessee produces Tax Residency Certificate (TRC). In such a case, under the present DTA, the NR businessman can claim that he does not have a PE in India. Hence his income will not be taxable in India.

(iii) There are NR assessees who are not entitled to DTA relief. Hence they do not get protection of PE. Their incomes will be – after 1st April, 2018 – covered under SEP & hence Business Connection. They will be liable to Indian Income-tax u/s. 9 (1) (i) Explanation (2A). Indian payers will be liable to deduct tax at source u/s. 195.