Technological advancements and the trend to move towards a digital economy have far-reaching implications with respect to taxation, both direct and indirect. A joint effort to address the need for tax reform is being taken by OECD/ G-20 since 2015-2016 under the "Inclusive Framework on BEPS". Base Erosion and Profit Shifting ("BEPS"), as defined by the OECD, refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties.1
Cross-border business operations use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. This is an issue for concern for any government that relies on corporate taxation. In order to tackle the growing concerns surrounding BEPS, the G20 leaders endorsed the "BEPS package" developed with OECD members, in an attempt to arrive at a harmonised approach. Part of this is the BEPS package of reports on 15 actions. These actions include measures such as revision of existing standards, practices to converge national practices and guidance on best practices, which countries may implement to prevent BEPS.
The Inclusive Framework on BEPS is the commitment made by countries to implement the BEPS package. India is a member of the Inclusive Framework on BEPS. Arriving at a harmonized approach is an ideal that is yet to be realized under the OECD.
India, as with several other countries, has been implementing its own measures to implement taxation of digital activities, including through the recent 2020 Budget. Three important legal concepts in this regard, including "equalisation levy", "significant economic presence", and "non-resident taxable person", are explained in this article.
The concept of "equalisation levy" is an aspect of BEPS Action 1 of imposing tax on cross border supplies of services and intangibles.
The equalisation levy in India came into force on 1st June, 2016, with the notification of Chapter VIII of the Finance Act 2016. Chapter VIII of the Finance Act 2016 lays down the applicability of equalisation levy, the method of collection, penalties for non-payment etc. The Finance Act, 2020 has amended the Finance Act, 2016 to expand the applicability of the equalisation levy.
Section 165 of the Finance Act, 2016 imposes an equalisation levy of 6% of the amount of consideration for any specified service received or receivable by a person, being a non-resident from:
- a person resident in India and carrying on business or profession; or
- a non-resident having a permanent establishment in India.
Equalisation levy is not charged when (a) the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment; (b) the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or (c) where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.2
The term "specified service" for the purpose of the equalisation levy is defined as, "...online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf..."3
A new Section 165A has been added to the Finance Act, 2016, in order to include the charge of:
"an equalisation levy at the rate of two per cent. of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it..." to:
- a person in India;
- a non-resident in the specified circumstances; or
- to a person who buys such goods or services or both using internet protocol address located in India, with effect from 1st April, 2020.4
This levy shall not be charged in the following circumstances:
- where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
- where the equalisation levy is leviable under section 165; or
- where the sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than two crore rupees during the previous year.5
Further, the term "specified circumstances", under which a non-resident would be subject to the newly introduced 2% equalisation levy has been defined as "(i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and (ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India".6
As the framework presently stands the following equalisation levies are in force in India –
- 6% equalisation levy is charged on services for the purpose of online advertisement ("specified services") rendered by a non-resident to and Indian resident or a non-resident with permanent establishment in India.
- 2% equalisation levy is charged on consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it to a person in India or using an Indian IP address, or to a non-resident in "specified circumstances", which has been defined as sale of advertisement targeted to an Indian customer/customer using Indian IP address or sale of data through an Indian IP address.
"Significant Economic Presence"
Another aspect of Action 1 of the BEPS package which has been addressed by tax reform in India, is the introduction of the concept of "Significant Economic Presence".
Significant Economic Presence was introduced as an amendment to Section 9 of the Income Tax Act, 1961 vide the Finance Act, 2018, (w.e.f. 1st April, 2019) and further amended vide the Finance Act, 2020. Section 9 of the Income Tax Act, 1961 lays down the criteria for income deemed to accrue of arise in India. The amendment to Section 9 specifies that for the purpose of the section, significant economic presence of a non-resident in India shall constitute "business connection" in India.
The term "Significant economic presence" has been defined in the Finance Act, 2020 to mean –
"...(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 previous 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:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—
- the agreement for such transactions or activities is entered in India; or
- the non-resident has a residence or place of business in India; or
- the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India..."7
The amendment to Section 9 of the Income Tax Act, 1961 clarifies that all transactions and activities shall constitute "significant economic presence" in India whether or not; (i) the agreement for such transactions or activities is entered in India; (ii) the non-resident has a residence or place of business in India; and (iii) the non-resident renders services in India.
The amendment to Section 9 of the Income Tax Act, 1961 therefore ensures that economic presence in India is not limited to situations of entities having a physical presence/permanent establishment in India. The implementation of this concept is limited to those countries with which India does not have a double taxation avoidance agreement ("DTAA"). Where a DTAA exists, the provisions of the DTAA would prevail over any amendment to the Income Tax Act, 1961. India currently has comprehensive DTAAs with 97 jurisdictions, including the USA, UK, Australia etc. For the amended Section 9 to apply to such countries, the existing DTAAs would have to be renegotiated.
"Non-resident taxable person" under GST
The Central Goods and Services Tax Act, 2017 defines "non-resident taxable person" as "...any person who occasionally undertakes transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India...".8 The GST provisions mandate the registration of non-resident taxable persons making taxable supply in India.
The BEPS Framework is still evolving, with the last round of meetings concluded in November 2019 where OECD/G20 countries discussed a unified approach towards the allocation of taxing rights and to undertake a coherent and concurrent review of the profit allocation and nexus rules specifically with regard to "user participation", "marketing intangibles", and "significant economic presence" proposals.9
But there are divergences in approaches, particularly between EU countries on the one hand, and the U.S., on the other, as regards on the manner in which multinational technology companies need to be taxed. While a harmonized approach is the ideal way to move forward, in order to limit the risks of revenue leakages, India has already started taking steps to implement such taxation.
1. OECD, What is BEPS?, accessed on 29.04.2020, (https://www.oecd.org/tax/beps/about/#mission-impact)
2. Section 165(2), Finance Act, 2016
3. Section 164(i), Finance Act, 2016
4. Section 165A(1), Finance Act, 2016 (as amended by Finance Act, 2020)
5. Section 165A(2), Finance Act, 2016 (as amended by Finance Act, 2020)
6. Section 165A(3), Finance Act, 2016 (as amended by Finance Act, 2020)
7. Section 5(a)(ii), Finance Act, 2020 (w.e.f. 1st April, 2022)
8. Section 2(77), Central Goods and Services Tax Act, 2017
9. OECD (2019), Public Consultation Document Secretariat Proposal for a "Unified Approach under Pillar One, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris (https://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposal-unified-approach-pillar-one.pdf) (accessed on 29.04.2020)
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