Understanding How the Concept of Significant Economic Presence Applies in Indian Taxation ( December 5, 2023)

In 2016, India became the first country to impose a 6 percent equalization levy on digital advertising and related services, a provision later expanded in 2020 to include the sales of online goods and services. Simultaneously, provisions for Significant Economic Presence (SEP) were discussed and introduced in 2018 after amending domestic law, with the current SEP provisions effective from FY 2021-22. In this discussion, we explore SEP provisions, draw comparisons with the equalization levy, and discuss stakeholder concerns.

BEPS Action Plan 1 and Indian adoption of the 'significant economic presence' concept

• India's digital market, currently valued at US$5,118 million, is expected to reach US$55,372 million by 2032. Concerned that existing international tax rules did not adequately cover non-brick-and-mortar business models, i.e., online commerce, the Indian government sought solutions from the Organisation for Economic Cooperation and Development (OECD) under the Base Erosion and Profit Shifting (BEPS) Action Plan 1. The OECD proposed three interim options: SEP, withholding tax on digital transactions, and equalization levy.
• Following this, India’s tax body, the Central Board of Direct Taxes (CBDT), established a committee on the taxation of e-commerce to evaluate these options. The committee recommended the equalization levy as the most viable option, avoiding modifications to existing tax treaties, and suggested the possibility of introducing SEP within the concept of "business connection." Subsequently, the SEP provisions were introduced in 2018 but remained inactive until the thresholds for implementation were prescribed. The current provisions, effective from fiscal years 2021-2023, deem non-residents with SEP in India to have a business connection, subjecting their income to Indian taxation.