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Need clarity in non-residents’ tax under SEP norms: Experts

Mumbai, Jan 14, 2023

The scope for taxing income of non-residents doing business in India was widened with effect from April 1, 2021. A ‘significant economic presence’ (SEP) of a non-resident constitutes a ‘business connection’ in India and income related to such activities is taxable in India. Tax experts are hoping for raising of the Rs 2-crore threshold in the forthcoming Budget and clarity on various issues.

An SEP exists if the non-resident carries out ‘any’ transactions in relation to goods, services or properties with any Indian resident if the aggregate payment for such transactions exceeds Rs 2 crore in a year. An SEP is also created if the non-resident ‘undertakes or is engaged in systematic or continuous soliciting of business activities’ with at least 3 lakh users.

Jiger Saiya, tax leader at MSKA & Associates, stated, “These provisions go beyond taxing digital business and transactions. They cover all and any transactions that non-residents may have with persons in India.” He further explained, “For those non-resident entities who are ‘affirmatively’ able to claim tax treaty benefits, the SEP provisions have limited applicability owing to treaty override. However, it impacts non-residents from countries with whom India does not have a tax treaty in place.”

From financial year 2021-22, non-residents who are required to file income tax (I-T) returns in India have to disclose whether they have an SEP — collating the information proves to be an onerous task, said a tax expert.

Sanjay Sanghvi, tax partner at Khaitan and Co, stated, “Implementation of this provision is a challenge. The first limb refers to a transaction with ‘any person in India’. Given the volume of transactions being carried out digitally, it would be helpful if some guidance is provided on this subject.”

Maulik Mehta, tax partner at BSR & Co, added, “It is unclear as to what is the scope and ambit of the expression ‘systematic and continuous soliciting of business activities’. Similarly, the term ‘user’ has not been defined and it could become a subject matter of different interpretation.” He pointed out, “Further, once the SEP is constituted, income has to be attributed to such SEP for the purpose of taxation in India, but till date no specific attribution rules have been prescribed.”

Tax experts hope that the Budget will clarify the nature of transactions that will be covered by SEP norms and prescribe an income attribution method.

[The Times of India]