CBDT has vide notification Dt. 03.05.2021 introduced rule prescribing threshold limit to determine significant economic presence of a business in India.
The below mentioned rule shall come into force from 01.04.2022.
Rule 11UD has been introduced in relation to clause (a) and clause (b) of Explanation 2A to sub-section (1) of section 9 which is as under:
“(1) For the purposes of clause (a) of Explanation 2A to clause (i) of sub-section (1) of section 9, the amount of aggregate of payments arising from transaction or transactions in respect of any goods, services or property carried out by a nonresident with any person in India, including provision of download of data or software in India during the previous year, shall be two crore rupees;
(2) For the purposes of clause (b) of Explanation 2A to clause (i) of sub-section (1) of section 9, the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakhs.”
Let’s understand what does this limit means and what effect it will have?
As mentioned above the above limit has been prescribed for determining significant economic presence of a business in India and this will in turn help in taxability of such businesses in India.
As per section 9(1)(i) the following income of a business will be deemed to accrue or arise in India:
“all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.”
Now let’s understand what is business connection. There are various explanations of this section which explains the meaning of business connection but the one relevant for significant economic presence is as under:
“For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall 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 no —
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) 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.”
Thus, if we combine all of the above and understand it’s implication we can derive as under:
Income of a business not in India shall be deemed to accrue or arise in India where the amount of transaction with any person in India in relation to goods, service or property including provision for download of data or software exceeds Rs. 2 crore in a financial year or if the number of users of such person in India is 3 lakhs or more.
Hence, if any business crosses any of the above threshold their income in relation to such transaction in India shall be taxable in India whether or not they have business operations in India.
If we look at the threshold mentioned above it is very small and hence this will cover many online businesses and their income will be taxable in India as per Income tax Act which was not the case earlier, because till now only such businesses were liable to be taxed in India who had their business operations in India.
Hence, various companies who are exporting goods to India or online apps which have huge base in India or websites doing online sale of software in India could be liable to tax in India for income earned from India in form of subscription charges or any such income.
Although, the businesses can take benefit of DTAA between India and their residence country if available, but with this amendment Indian Income tax department can ask for taxation of such income in India and hence compliances for such businesses would increase in India to take benefit of such DTAA provisions as many DTAA still tax business profit based on permanent establishment i.e. physical presence.
Thus, this could increase the scope of professionals practicing in cross border and international taxation in India and various apps which were till now earning from India and not paying tax in India could be liable for tax in India.
What are your thoughts on same? Comment below.
It is important to note that the amendment to explanation was made by Finance Act, 2020 wherein it was said that said amendment will be applicable from 01.04.2022 and hence apply to AY 2022-23 and onwards and accordingly it could be said that such rule is also applicable from 01.04.2022 but will apply to AY 2022-23 and hence applicable for current financial year.
Also while inserting new explanation 2A by Finance Act, 2020 it was said that such old provision will be omitted from 01.04.2021 i.e. from AY 2021-22 and new provision will apply from 01.04.2022 and will hence apply for AY 2022-23 which is a bit confusing,
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