On 1 February 2018, the Finance Minister has released India’s 2018-19 budget and finance bill. The budget proposes to update the definition of a permanent establishment (PE) to tax non-resident digital firms operating in India.
According to the proposal, a business connection includes a ‘significant economic presence’ in India and a ‘significant economic presence’ means:
- 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
- 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.
The expansion of the definition of business connection to align PE rules with the BEPS MLI and BEPS Action 7 and provide that a business connection would include any business activities carried out through a person who, acting on behalf of a nonresident, habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by the nonresident, and the contracts are:
- In the name of the non-resident; or
- For the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that the non-resident has the right to use; or
- For the provision of services by that non-resident;
However, the rule is targeted at companies such as Google and Facebook that are based overseas and provide digital services in India, besides app developers that have users in India, tax officials said. It will encourage Indian digital enterprises and give them a level playing field and also drive their foreign peers to set up shop here.
