India’s tax administration authority will not spare non-resident Indians (NRIs) from taxation if they operate digitised businesses but do not have physical presence in the country.
As per new rules from the Central Board of Direct Taxes (CBDT), NRIs transacting businesses with their Indian parties or clients will be liable to pay domestic tax.
“This means, any transaction of more than INR 20m ($272,150, £192,547, €223,877) in respect of any goods, services or property carried out by them with any person in India will attract tax in India,” said Benoy Sasi, international lawyer at DIFC Courts.
What makes it interesting is that the provision of downloading data or software in India is also included in the definition of transactions. The authorities have now made it clear that NRIs will be considered to have an economic presence in India even if it is only virtual.
The notification said that the provisions of significant economic presence (SEP), which forms the base of the taxation of NRIs in India, will also apply if the number of users with whom systematic and continuous business activities are solicited, or who are engaged in interactions.
Sasi clarified: “The provisions of SEP also apply if the number of users with whom ongoing business activities are requested is more than 300,000.”
Taxing by other means
SEP criteria were introduced in 2018 for the purpose of taxing NRIs operating online businesses that operate without a physical presence.
That means an NRI with an SEP in India will constitute a business connection in India and open the door to taxation.
These provisions were further amended through the Finance Act 2020, which defined an SEP as a transaction in respect of any goods, services or property carried out by an NRI with any person 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 year exceeds a threshold or systematic and continuous soliciting of business activities or engaging in interaction with a defined number of users in India.
The new provisions are applicable from financial year 2021-22 (April 2021-March 2022).
It has now become fully functional with CBDT notifying the thresholds for triggering SEP and consequently tax liability in India.
Don’t worry UAE NRIs
But NRIs in the UAE need not be overwhelmingly worried about their tax liability in India.
They can offset the taxability under these provisions by exploring relief under double taxation avoidance agreements.
The UAE is one of the countries with which India has signed double taxation avoidance agreement.
