BUDGET 2018 OF INDIA AND BUSINESS
CONNECTION- SOME THOUGHTS….
By Gayatri Sridharan, Tarkaanveshan
The Finance Bill, 2018, has sought
to expand the definition of the term "Business Connection" as
it appears in clause (i) of sub-section (1) of section 9 of the Income Tax
Act , 1961 to include in its scope a “significant economic presence”.
OECD under its BEPS Action Plan 1
addressed the tax challenges in a digital economy wherein it has discussed
several options to tackle the direct tax challenges arising in digital
businesses. One such option is a new nexus rule based on “significant
economic presence”. As per the Action Plan 1 Report, a non-resident
enterprise would create a taxable presence in a country if it has significant
economic presence in that country on the basis of factors that have a
purposeful and sustained interaction with the economy by the aid of
technology and other automated tools. It further recommended that revenue factor
may be used in combination with the aforesaid factors to determine
'significance economic presence'.
The existing provisions of clause
(i) of sub-section (1) of section 9 of the Income Tax Act , 1961 of
India essentially provides for physical presence based nexus rule for
taxation of business income of the non-resident in India.
Explanation
2 to the said section which defines ‘business
connection’ is also narrow in its scope since it limits the taxability of
certain activities or transactions of non-resident to those carried out through
a dependent agent. Emerging business models such as digitized businesses, which
do not require physical presence of itself or any agent in India, are not
covered within the scope of clause (i) of sub-section (1) of section 9 of the
Act.
In view of the above, the 2018
Budget proposes to amend clause (i) of sub-section (1) of section 9 of the Act
to provide that’ significant economic presence' in India shall also
constitute 'business connection'.
“Significant economic presence”
for this purpose, has been defined as -
(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.
It is further proposed to provide
that only so much of income as is attributable to such transactions or
activities shall be deemed to accrue or arise in India. It is further proposed
to provide that the transactions or activities shall constitute 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.
The proposed amendment in the
domestic law will enable India to negotiate for inclusion of the new nexus rule
in the form of 'significant economic presence' in the Double Taxation Avoidance
Agreements. It has been clarified that the aforesaid conditions stated above
are mutually exclusive. The threshold of “revenue” and the “users” in India
will be decided after consultation with the stakeholders. This development
is in line with the decision of the Apex Court of India in the case of Jolly
George Varghese and Others vs. Bank of Cochin[AIR 1980 SC 470].
In this case, the Honorable Supreme Court of India, in the words of Justice
Krishna Iyer had opined that “The positive commitment of the State Parties
ignites legislative action at home but does not automatically make the covenant
as enforceable part of the corpus juris of India “.
Further, it has been also
clarified that unless corresponding modifications to PE rules are made in the
DTAAs, the cross border business profits will continue to be taxed as per the
existing treaty rules. This amendment will take effect from 1st April, 2019 and
will apply in relation to assessment year 2019-20 and subsequent assessment
years.
This amendment has come in the wake
of a series of judgments of the Apex Court of India whereby even the
holding of a grand prix or a limited presence within India was held to
constitute a permanent establishment within India. As per the Supreme Court of
India as laid down in a series of recent judgments certain amount of space
at the disposal of the enterprise which is used for business activities is
sufficient to constitute a place of business. No formal legal right to use that
place is required. Thus, where an enterprise illegally occupies a certain
location where it carries on its business that would also constitute a PE. Some
of the examples where premises are treated at the disposal of the enterprise
and, therefore, constitute PE are: a pitch in a market place, or by a certain
permanently used area in a customs depot (e.g. for the storage of dutiable
goods). Again the place of business may be situated in the business facilities
of another enterprise. This may be the case for instance where the foreign
enterprise has at its constant disposal certain premises or a part thereof
owned by the other enterprise
What about Equalization Levy?
In 2016 the India Legislature
enacted a levy to plug the loopholes in the outdated definition of the
"permanent establishment" in the Double Taxation Avoidance Treaties
entered into by India and also in keeping with the recommendations of the G-20
Action plan to regulate and contain Base Erosion and Profit Shifting in the
case of multinational entities.
To attract the new Equalization
Levy, there is no need to determine if there exists a Permanent Establishment
or any other nexus to India. Merely earning of revenue from India from
specified services makes a nonresident liable to Equalization Levy. Revenue is
the source. When in excess of the threshold, it is the nexus adequate for
India’s tax jurisdiction..
The introduction the Equalization
Levy which is nothing but what in the UK is called the Google Tax also
addressed the issue of Double Taxation on such levy and mandated that such
income on which the levy is paid or deducted at source would not attract Income
Tax. Simultaneously it was enacted that if a particular income/receipt was
subject to Income Tax , such income could not again be subject to an
Equalization Levy..
The levy was also restricted to
income from specified services rendered by the foreign entity only and not to
sale/purchase of goods.
Some
questions that need to be answered......
- The new definition of business
connection invoking the existence of a significant economic presence would
hence lead to a taxation of the same receipt twice over at least in
respect of the specified services.
- Further in the wake of
India's high tax rate in comparison with those of US and other nations how
helpful is this source based taxation in attracting Foreign Investments?
- How will it affect the taxpayer
given the high rate of taxation in India?
- What about the countries who
have a right to tax such profits on the basis of residence? will they have
to give up their rights?
