What is Significant Economic Presence (SEP) principle?

India recently notified Digital Tax threshold of two crore rupees and 300,00 users under the Significant Economic Presence principle. This threshold was notified for non-resident technology firms such as Netflix, Facebook, Google, to pay tax in India. The principle was first introduced in the Finance Bill 2018-19.

It was adopted to address the challenges of tax profits made by the digital companies.

What is Significant Economic Presence?

It means that a transaction in goods or services or property carried out by a Non-Resident in India. This includes download of software or data. In June 2019, the Finance Minister Nirmala Sitharaman called on the G-20 countries to adopt the “Significance Economic Presence”.

Background

The Significant Economic Presence concept was introduced in 2018 under Income Tax Act, 1961. It was basically introduced to tax the income of non-residents. These incomes are those related to goods and services or property in India.

Inception of Significant Economic Presence

In 2015, the Organisation of Economic Cooperation and Development (OECD) issued fifteen Base Erosion and Profit Shifting (BEPS) Action Plans (AP). The BEPS-AP 1, that is, the first report of BEPS-AP is about tax challenges in the digital economy. It stated that it is important to examine enterprises that earn profit in the digital economy.

Apart from Significant Economic Presence, the BEPS-AP also analysed several other challenges. This includes Equalisation Levy that was implemented in 2016 in India.

What is Equalisation Levy?

It was introduced to tax business to business transactions that happen digitally. This mainly targeted at taxing the income accruing to foreign E-Commerce companies from India. Accruing is someone receiving money at increasing rate over time.

Month: Current Affairs - May, 2021