Digital Tax: SEP Threshold Impact On Indian Companies And Non-Residents

Owing to the advent of digitalisation, India has been keen on taxing foreign digital businesses and adopted the concept of ‘Equalisation Levy’ and ‘Significant Economic Presence’ in its domestic law. SEP regulations were initially introduced in 2016 and the scope was widened in 2020. However, these provisions were deferred till April 2021.

At a concept level, SEP expanded the scope of income for a non-resident doing business with India. The provisions expanded the scope of ‘business connection’ (similar to Permanent Establishment) for non-resident, which may result in higher tax liability and compliances for non-residents. The tax rate applicable would be 40% (plus applicable surcharge and cess).

The SEP provision was deferred on grounds that a multilateral solution under the Organisation for Economic Co-operation and Development is being considered where all tax treaties will get amended automatically. Even though OECD and Group of 20 countries recognised the magnitude of digitalisation and devised the Base Erosion and Profit Shifting Action Plan 1 to address the tax challenges raised by digitalisation, it has not reached a global consensus to date.

Nevertheless, India has deemed it fit to operationalise the SEP provisions from April 1, 2021. This is done by notifying the ‘prescribed threshold’ vide notification dated May 3, 2021. As per this notification, a revenue threshold of Rs 2 crore and a user limit of 3 lakh users have been notified.

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