On 1 February 2018, the Finance Minister has released India’s 2018-19 budget and finance bill. The 2018 budget proposed to amend the definition of a permanent establishment for the taxation of non-resident digital companies operating in India.

According to the proposal, a business connection includes a “significant economic presence” in India. A significant economic presence is defined as systematic and continuous soliciting of business activities or engaging in interaction with users in India through digital means (above certain specified thresholds); or transactions in goods, services or property carried out by a non-resident in India including the provision of downloads of data or software in India, above specified thresholds.

The definition of a PE is also extended to cover activities carried out through a person who habitually plays the principal role in conclusion of contracts that are in the name of the non-resident; that relate to transfer of ownership or right to use in relation to a property owned by the non-resident or which the non-resident has a right to use; or contracts for provision of services by the non-resident.

In addition to the domestic law change India’s double taxation treaties would have to be amended to make this provision effective with treaty partner countries.

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.