In order to address the problem of Base Erosion and Profit Shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) framed various Action Plans. BEPS Action Plan 1 suggested measures to addresses the challenges posed by the Digital Economy. Taking a cue from this Action Plan, India has been a front runner in implementing measures viz., Equalisation Levy (EL) and Significant Economic Presence (SEP).
While the provisions pertaining to SEP were introduced in 2018, Finance Act, 2020 has substituted the said provisions. Further, for the purpose of attracting SEP provisions, a threshold was to be prescribed. Recently, the Central Board of Direct Taxes (CBDT) has issued a Notification1 notifying the threshold for the purpose of applying SEP provision.
We, at BDO in India, have summarised this Notification and provided our comments on its impact hereunder:
What is SEP?
As per Explanation 2A to section 9(1)(i) of the Income-tax Act, 1961 (IT Act), SEP of a non-resident in India shall constitute business connection in India. For this purpose, the SEP means:
a. Transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the fiscal year exceeds such amount as may be prescribed; or
b. Systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed.
Are the criteria cumulative?
No. The SEP provision could get attracted even if one of the criteria is satisfied.
What are the thresholds prescribed?
Notification1 has inserted new Rule 11UD in the Income-tax Rules, 1962 (IT Rules) to provide following thresholds:
INR 20 million for criteria covered by (a) above; and
3 lakhs users for criteria covered by (b) above
From when will the Rule 11UD of the IT Rule be applicable?
The new Rule 11UD of the IT Rules shall come into effect from 1 April 2022.
Team- Intellex Strategic Consulting Pvt Ltd
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