Indian Union Budget 2018 Introduced another definition to constitute business connection in India

Significant Economic Presence

The BEPS Action Plan 1 focuses on solving the digital issue i.e. identifying appropriate tax rules for addressing the tax challenges presented by digital businesses. The final report on BEPS Action Plan recommended that nexus of an income should be established where a non-resident has a “significant economic presence” evidenced by factors such as revenue from remote transactions, local domain names, localized websites, local currency payment options, number of active users in a country, online contracting and data collection.

In the view of above, the Indian government has proposed to amend the definition of business connection as defined in Section 9(1)(i) of the Income Tax Act, 1961 by inserting Explanation 2A to provide that “Significant Economic Presence” in India shall constitute business connection in India.

“significant economic presence for this purpose shall mean-

(i) any 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 the amount as may be prescribed; or

(ii) systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

The income attributable to such transactions shall be deemed to accrue or arise in India. Further, it is pertinent to note that it would be irrelevant whether the non-resident has a place of residence in India or not. The threshold limit for such transactions has not been prescribed by the government. It is expected that the government would be careful in deciding such threshold limit so that other unintended digital transactions are not covered in the definition of “significant economic presence”, which would invite unnecessary litigation cost.

The provision of “significant economic presence” has not been incorporated in any tax treaty which India has entered, and thus would have a limited impact. The government may intend to accordingly renegotiate its tax treaties.