Union Budget 2018: E-commerce, defined to mean business activities carried out by digital means, is largely in the realm of non-tangible goods and services provided through the internet. It does, however, encompass e-tail activities, which mean selling goods and services ordered online. In case of a foreign company engaged in selling goods and services in India, so far, the position has been that it would be taxed in India on this business income provided the company either had a dependent agent in India who habitually concluded contracts for it in India and/ or the foreign company had a physical presence in the form of an office or place of business through which the business was carried out. In case of online business, where goods are ordered on the internet without the foreign company having any presence in India or having an agent who concluded the contracts in India, there would not be a business connection in India and the foreign company’s income would not be taxable in India.
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The Base Erosion and Profit Shift programme of the OECD identified this as one of the issues which needed to be addressed and proposed certain alternative options which the countries negotiating treaties would bilaterally agree to resolve it. While the bilateral tax treaties that India has entered into would need to undergo re-negotiations to address this situation, the Finance Bill introduces a new provision in the Income Tax Act under the definition of ‘business connection’. It clarifies that ‘significant economic presence’ of a non-resident in India would constitute business connection in India. The existence of business connection would enable India to tax non-resident’s business income.
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Significant economic presence would be created if the aggregate payments from India for download of goods and services in India would exceed a certain amount to be specified later. Also, it would be created if there is systematic and continuous soliciting of business activities or engaging and interaction with such number of users as would be prescribed. This provision would enable India to tax such income of a foreign company under the Income Tax Act, only if the foreign company is from a country with which India does not have a tax treaty. In case of foreign companies coming from treaty countries, this provision would need to be incorporated in the treaties to become effective.
This does indeed open a hugely complex issue of tax deduction at source. It also needs to be ensured that there is no overlap with the payment of ‘equalisation levy’ on online advertisements, which was introduced by the Finance Act 2017. One is apprehensive about the implementation of this provision. The fact that certain notifications are awaited before this provision becomes effective and implemented, one hopes that there will be more clarity on its implementation.
Daksha Baxi, Executive Director, Khaitan & Co