Economic policy making is historically driven by countries exercising their sovereign function of taxation to propel the growth of their economies in the right direction. But when we consider cross-border transactions involving entities from multiple countries, the challenge of determining which nation is entitled to tax comes up. A more concrete solution to demarcate the specific tax share to be allocated amongst nations was found historically in the form of Double Taxation Avoidance agreements (‘Tax treaties’) between nations.
The advent of digital economy has posed challenges to the established tax regime that was typically applicable to tax brick-and-mortar entities. This challenge has been a primary concern for nations and the Organization for Economic Cooperation and Development, which led to the formation of a task force to consider the facets of base erosion and profit sharing. In 2015 the report of the “Action Plan” came up with suggestions with one of them being the concept of ‘Significant Economic Presence’ (‘SEP’) to establish a nexus for taxation. While introducing the concept of SEP in Tax treaties was an extensive and time-consuming exercise, countries took steps to introduce this concept in their respective domestic laws.
The concept of SEP was first adopted by India through the Finance Act 2018 which inserted this concept in section 9 of the Act. This was however implemented by providing for threshold limits which were applicable from April 1, 2021 onwards. The concept of SEP essentially expanded the scope of business connection which brought many non-resident entities into the tax fold. The SEP concept applied to non-residents regardless of whether they had a presence in India. However, annual threshold limits of INR 2 cr for the transaction value with regard to goods and services or number of users being 300,000 with whom continuous and systematic business was sought was made applicable from April 1, 2021.
Nonetheless, non-residents continued to take recourse to the beneficial provisions of the relevant Tax treaties wherein selling of goods to India could not be subject to tax in India in the absence of a Permanent Establishment (‘PE’). To avail the benefit of the Tax treaties, the non-resident is required to furnish Tax Residency Certificate (‘TRC’) and details in statutory form 10F where the TRC does not have the requisite details. Essentially, if the non-resident fulfills all the requirements to avail treaty benefit (TRC and Form 10F if required), and a declaration supporting the non- existence of a PE in India, the Indian entity need not withhold any taxes. But in a situation where the requisite documents are not available, the Indian entity would have to withhold applicable taxes as it would have established a business connection in view of SEP under the provisions of section 9 of the Act. Failure to comply with the withholding tax obligations may run the risk of an adverse outcome by way of recovery of taxes, interest, and penalty for the Indian importer.
Non-residents who are involved in selling goods to India are also not required to obtain a Permanent Account Number wherein they are not assessable to tax in India. This is by taking a view that the condition of assessable to tax in India has to be examined under the provisions of the Act read with the relevant Tax treaty and not the provisions of the Act on a stand alone basis. The Central Board of Direct Taxes had allowed such non- residents to manually file 10F till September 30, 2023. However, no extension for manual filing of Form 10F beyond September 30, 2023 has been granted to non- residents who are not required to have a PAN. Going forward, such non-residents are required to provide the requisite details on the income tax portal. Such details include details relating to the tax ID of the non-resident, its key person and his tax ID, TRC, etc. besides basic details. In the absence of completing these formalities, the Indian importers would be unable to provide treaty benefit to the non-resident and would hence be required to comply with withholding tax provisions.
While this change in filing requirements has been done by keeping in mind how to tackle the challenges that come with revenue collection, it does come up with its own set of issues that might place an onerous burden on foreign entities currently engaged in selling goods to Indian entities. Such an approach may result in non- residents insisting on a net off-tax contract which may result in increasing the overall cost for the Indian importers in some cases.
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