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The law in question is
Explanation 2A of section 9(1)(i) of the 2018 Finance Act, which was passed
earlier this year. Under that provision, “significant economic presence” will result
in taxable “business presence” in India regardless of whether the taxpayer has
any physical presence there. For reference, “significant Economic Presence”
in respect of any goods, services, or property carried out by a non-resident of
India including provision of download or data or software in India if the
aggregate of payments … during the previous year exceeds the 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.”
The new law therefore leaves it
to the tax authorities to determine revenue thresholds for both physical goods
or services, and the number of users that would amount to a significant
Related: Inclusiveness & Protectionism: A Time to Pause & Rethink for India's IT Sector
The consultation is designed to
solicit input as to those items. Comments are due by 10 August 2018.
The new Indian law joins a host
of other efforts in other countries to come to grips with the increase in
digital businesses, in which the business has no physical presence in a country
but derives substantial profits there from customers or users. For example, the
EU is considering similar provisions, and so is Canada.
Like Canada, but unlike the EU,
the Indian provision seeks to tax not only services and intangibles, but also
sales of physical goods in the country by means of the internet.
Although the consultation seeks
input on the thresholds noted above, it does not address how profits
attributable to India would be determined, nor whether a business with the
requisite number of customers in India but without the requisite revenue would
nevertheless face taxation.
Related: India Provides Tax Relief for Start-ups
Worldwide ERC® members who
provide services in India (for example, to transferees) may face taxation there
even if they do not have an office or employees in that country. Such companies
will want to watch the implementation of this provision closely, and may want
to provide input pursuant to the consultation. Although it is likely that
revenue levels and numbers of customers will be set to ensnare larger
businesses, that outcome is far from certain.
Worldwide ERC® continues to monitor the impact of the Tax Cuts and Jobs Act on talent mobility programs and policies.
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