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May 6, 2021

CBDT notifies digital tax threshold of Rs 2 crore and 300,000 users under section 9(1) of the Income Tax Act

CBDT notifies digital tax threshold of Rs 2 crore and 300,000 users under section 9(1) of the Income Tax Act

Finance Act 2018 made amendment in section 9(1)(i) of the Income Tax Act, 1961 to bring in the concept of “Significant Economic Presence” (‘SEP’) for establishing a business connection in India of a non-resident. According to the said Section, “significant economic presence” for the purpose of section 9(1) (i) shall mean:

  • “transaction in respect of any goods, services or property carried out by a non-resident 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
  • Systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

Section 9(1) (i) further provide that the transactions or activities shall constitute a significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India or agreement for such transactions/ activities entered in India.

The provision of Significant Economic Presence enlarges the scope of income of non-residents by establishing the business connection of non-residents in India. However, since thresholds were not notified since the introduction of Significant Economic Presence provision, the provision remained inoperative.

The Central Board of Direct Taxes (CBDT) on 3rd May 2021 announced that the threshold limit for digital tax would be 2 crores and for non-resident technology firms it would be limited to 300,000 users. This shall come into force with effect from the 1stday of April, 2022.

Under new or updated bilateral tax pacts, a revenue threshold of Rs 2 crore and a cap of 300,000 users for non-resident technology firms such as Google, Facebook, and Netflix to pay tax in India.

Existing DTAAs will not be covered under this proposed change unless DTAAs are re-negotiated. Accordingly, non-resident of the treaty jurisdiction can take recourse to the beneficial provision of DTAA. Consequently, the relevance of the amendment may be restricted till the time treaty benefit is available.

However, non-resident of a non-treaty jurisdiction may need to assess the impact. The interplay between Equalisation Levy and SEP needs to be looked into when both the provision are in force parallelly.

Below is the extract of notification released by the CBDT:

In exercise of the powers conferred by the clause (a) and clause (b) of Explanation 2A to sub-section (1) of section 9 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. Short title and commencement. —(1) These rules may be called the Income-tax (13th Amendment) Rules, 2021. (2) They shall come into force with effect from the 1st day of April, 2022.

2. In the Income-tax Rules, 1962, after rule 11UC, the following rule shall be inserted, namely:-

“11UD. Thresholds for the purposes of significant economic presence. — (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. ”.

Read the notification of CBDT from below

CBDT-notifies-digital-tax-threshold-of-Rs-2-crore-and-300000-users-under-section-91-of-the-Income-tax-act-1961

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