Significant Economic Presence (‘SEP’)
Firstly, the SEP rule, inspired by OECD’s BEPS Action Plan 1 framework, signifies a paradigm shift in how India views the nexus theory for taxing foreign entities. This rule stipulates that a foreign entity can be taxed in India if it has, in India, a significant digital or economic footprint, even without a physical presence.
While SEP rule was initially introduced with the objective of taxing only companies operating in the digital space, the way in which it has been incorporated in the domestic law suggests otherwise. As a result, a lot of foreign companies that are otherwise involved in traditional businesses, ie provision of physical goods or services are also covered under the ambit of SEP. Further, revenue threshold for triggering SEP in India is set at INR 20 million which is way lower than OECD recommendation of EUR 1 million. Accordingly, the government should consider increasing the revenue and the user threshold and restrict them to digital transactions.
Lastly, the SEP provisions do not provide for any objective criteria for income attribution to a foreign entity should it trigger SEP in India. It may be good for the government to lay down certain objective criteria for attribution of profits to SEP to avoid any potential controversy on this front.
Equalisation Levy (‘EL’)
Originally introduced in 2016, scope of EL was expanded in 2020 to provide that there shall be charged a levy at the rate of two per cent of the amount of gross consideration receivable by an e-commerce operator from e-commerce supply or services. Compliance with EL provisions require foreign companies to register, file EL returns, and pay the levy on specified dates, necessitating an additional compliance requirement.
Filing of tax returns by foreign entities
Foreign entities constituting SEP may not be obligated to pay any tax in India if they are protected by tax treaties. Similarly, foreign entities subject to EL are also exempt from levy of income-tax. However, they would still be under the obligation to file tax return in India, thereby adding to their compliance woes. The government should consider providing for an exemption from filing of tax return in such cases to ease their compliance load.
e-Form 10F
Foreign entities, in order to claim benefit of tax treaty, are required to electronically furnish Form 10F in addition to TRC, if all the requisite details are not mentioned in the TRC. To furnish the form electronically, foreign entities need to obtain tax registration in India, i.e. PAN. While the government did relax the requirement to obtaining PAN, it is only for those taxpayers who are not required to obtain PAN. The rider virtually leaves very handful of cases that can take shelter of the relaxation. It may significantly help the cause of the foreign entities if the condition to furnish Form 10F electronically is relaxed.
Refunds
Obtaining tax refunds has always been a cause of concern, more so in case of foreign entities. In order to claim refund, it is necessary for the foreign entity to furnish a tax return in India. Despite furnishing of tax return, if the taxes withheld are not reflected in Form 26AS of the foreign entity, the tax authorities generally do not grant credit for such taxes. If all goes well and tax refund is determined upon processing of the tax return, the woes continue as the refund does not get credited to the overseas bank account of the foreign entity. A special purpose bank account is required to be opened in India by the overseas entity, wherein the refund can be credited. In a nutshell, obtaining a legitimate refund is a long drawn process.
Advance rulings
Lastly, one of the Dispute Resolution mechanisms that could have saved foreign investors from tax litigation was the Advance ruling mechanism, which in its latest avatar is governed by the Board of Advance rulings. Barring the first couple of years, this optimal way of ensuring disputes are nipped at source hasn’t been operational.
Conclusion
While any changes in Budget 2024 to resolve above aspects would be welcome, there has to be a larger shift in the mindset when it comes to tax administration. India will reach the US$5 tn economy soon but improving investor sentiment, especially by minimizing compliances and tax disputes will bring it earlier and ensure a sustainable growth going forward.
Abhishek Jain is Partner and National Leader, Indirect Tax, KPMG in India and Nikit Popli is Partner Indirect Tax and Governmental incentives, KPMG in India.
with inputs from Maulik Mehta and Pratik Soni, who are Chartered Accountants.