CBDT vide Notification No. 41/2021 dated 3.5.2021 through Income-tax (13th Amendment) Rules, 2021 has inserted a new Rule 11UD in Income-tax Rules, 1962 to define the threshold limits for Significant Economic Presence.
Rule 11UD provides that for the purposes of clause (a) of Explanation 2A to section 9(1)(i), the threshold limit shall be Rs. 2 crores whereas for the purpose of clause (b) of Explanation 2A to section 9(1)(i), the threshold limit shall be 3 lakhs. In other words, the transaction-based threshold is Rs. 2 crore [clause (a)] whereas user based threshold is 3 lakhs users in India [clause (b)].
The Finance Act, 2020 has amended the definition of ‘Business Connection’ contained in section 9 of the Income-tax Act, 1961 to provide that a significant economic presence of a non-resident in India shall constitute business connection in India bringing income earned by way of such significant economic presence under the tax net in India.
Explanation 2A is inserted in clause (i) of sub-section (1) of section 9 by the Finance Act, 2020 and is effective from 1-4-2022.
The Finance Act, 2020 defines “significant economic presence” as
(i) 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 such amount as may be prescribed; or
(ii) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means
This is also commonly called ‘Digital PE’. Overseas entities that don’t have a physical presence in India but derive significant financial benefit from Indian customers will come under the Indian tax net.
Read the full text of Notification No. 41/2021 dated 3.5.2021 on thresholds for ‘Significant Economic Presence’
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 3rd May, 2021
INCOME-TAX
G. S. R. 314(E).— In exercise of the powers conferred by the clause (a) and clause (b) of Explanation 2A to sub-section (1) of section 9 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. Short title and commencement. —(1) These rules may be called the Income-tax (13th Amendment) Rules, 2021.
(2) They shall come into force with effect from the 1st day of April, 2022.
2. In the Income-tax Rules, 1962, after rule 11UC, the following rule shall be inserted, namely:-
“11UD. Thresholds for the purposes of significant economic presence.— (1) For the purposes of clause (a) of Explanation 2A to clause (i) of sub-section (1) of section 9, the amount of aggregate of payments arising from transaction or transactions in respect of any goods, services or property carried out by a nonresident with any person in India, including provision of download of data or software in India during the previous year, shall be two crore rupees;
(2) For the purposes of clause (b) of Explanation 2A to clause (i) of sub-section (1) of section 9, the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakhs. ”.
[Notification No. 41 /2021/ F. No. 370142/11/2018-TPL]
KAMLESH CHANDRA VARSHNEY, Jt. Secy.
Note: The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section-3, Sub-section (ii) vide number S.O. 969 (E), dated the 26th March, 1962 and last amended vide notification number G.S.R. 301(E), dated 30th April,2021.
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