4 May 2021
EY Tax Alert
Tax Alerts cover significant
tax news, developments and
changes in legislation that
affect Indian businesses. They
act as technical summaries to
keep you on top of the latest tax
issues. For more information,
please contact your EY advisor.
1
The apex administration body for direct
taxes in India
CBDT issues thresholds for
triggering “significant economic
presence” in India
Executive summary
This Tax Alert explains Notification No. 41 dated 3 May 2021 issued by the Central
Board of Direct Taxes (CBDT)1 prescribing revenue and user thresholds for applicability
of new nexus rule under the Indian Tax Laws (ITL).
In order to tax non-residents (NR) carrying out business remotely in India, India
expanded the concept of business connection (BC) to include a new nexus rule based
on “significant economic presence” (SEP). As per SEP provisions, a BC will be
constituted in India based on below parameters:
a) Revenue-linked condition: Any transaction in respect of any goods, services or
property carried out by an NR with any person 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 tax year exceeds the amount as may
be prescribed; or
b) User-linked condition: Systematic and continuous soliciting of its business
activities or engaging in interaction with such number of users in India as may be
prescribed
 For determination of above thresholds, the CBDT
invited suggestions from the stakeholders and
pursuant thereto, on 3 May 2021, it issued a
Notification2 prescribing the revenue and user
thresholds for applicability of SEP provisions as
under:
• For revenue-linked condition stated in (a)
above, a revenue threshold of INR 2 crores (INR
20 million) shall be applicable
• For user-linked condition stated in (b) above, a
user threshold of 3 lakhs (0.3 million) shall be
applicable
These thresholds are applicable from 1 April 2022
(i.e. tax year 2021-22 onwards) aligning with the
effective date of the new nexus rule.
By notifying the revenue and user thresholds
necessary to activate the provision, the CBDT has
put SEP provisions into operation.
Background of new nexus
rule
The technological revolution has changed the entire
business landscape whereby entities can carry out
businesses the world over, without actually having
any physical presence. However, existing tax laws
are primarily driven by the physical presence of
business and, hence, obsolete and incapable to
effectively tax the digital economy (DE). For
instance, the current tax treaty provisions tax
business income based on the physical presence in
the form of a permanent establishment (PE) and,
thus, are inadequate to cover remote transactions.
In absence of efficient tax rules, taxation of DE has
become a key base erosion and profit shifting
(BEPS) concern across the globe and a multilateral
coherent solution towards the same is being
discussed as part of OECD3 and G20’s4 BEPS
project.
In India, these emerging remote business models
remained outside the realm of the ITL due to the
restrictive scope of the definition of BC in India,
which failed to cover remote presence/activities of
an NR in India.
Pursuant to BEPS discussions, India introduced
equalization levy (EL) in 2016 on online
advertisement-related service and subsequently
expanded its scope substantially in 2020 to cover e-
commerce supply and service. The EL is intended to
operate outside the framework of current tax treaty
framework. Furthermore, the income from activities
covered by EL are exempted from income-tax.
Further, vide Finance Act, 2018 (FA 2018), India
expanded the concept of BC to include a new nexus
rule based on SEP.
2 3
Notification No. 41 /2021/ F. No. Organisation for Economic Co-operation and Development
370142/11/2018-TPL 4
Group of 20
Description of SEP as new
nexus rule
As per SEP provisions, a BC will be constituted in
India based on below parameters:
a) Revenue-linked condition: Any transaction in
respect of any goods, services or property
carried out by an NR with any person 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 tax year exceeds the amount as may
be prescribed; or
b) User-linked condition: Systematic and
continuous soliciting of its business activities or
engaging in interaction with such number of
users in India as may be prescribed
SEP will be determined independent of whether the
agreement for such transactions or activities are
entered into in India or the NR has a residence or
place of business in India or the NR renders services
in India.
Further, once NR triggers SEP in India, only so
much of income as is attributable to the
transactions or activities referred to in condition (a)
or (b) shall taxable in India. Additionally, income
attributable to transactions and activities referred
to in condition (a) or (b) shall also cover income
from:
(i) such advertisement which targets a customer
who resides in India or who accesses the
advertisement through internet protocol (IP)
address located in India;
(ii) sale of data collected from a person who resides
in India or who uses IP address located in India; and
(iii) sale of goods or services using data collected
from a person who resides in India or who uses IP
address located in India
While SEP provisions were originally intended to
become applicable from tax year 2018-19 onwards,
considering the on-going international discussions
to tax DE, SEP provisions were deferred and
subsequently made applicable from tax year 2021-
22 onwards.
Public consultation on
revenue and user-based
thresholds for triggering SEP
The threshold of “revenue” and “number of users”
in India (as stated above in (a) and (b) conditions)
were to be prescribed by the CBDT. In this regard,
the CBDT issued a Notification5 dated 13 July 2018
inviting suggestions/comments from stakeholders
and the general public.
Suggestions/comments were invited on the
following aspects:
► Revenue-threshold of the transaction in respect
of physical goods or services carried out by an
NR in India.
► Revenue-threshold of the transaction in respect
of digital goods or services or property,
including provision of download of data or
software carried out by an NR in India.
► Threshold for number of “users” with whom an
NR engages in interaction or carries out
systematic and continuous soliciting of
business activities in India through digital
means.
Final notification providing
thresholds for trigger of
SEP:
Pursuant to the public consultation, the CBDT has
issued a Notification dated 3 May 20216 prescribing
the revenue and user thresholds for applicability of
SEP provisions as under:
• For revenue-linked condition stated in (a)
above, a revenue threshold of INR 2 crores (INR
20 million) shall be applicable
• For user-linked condition stated in (b) above, a
user threshold of 3 lakhs (0.3 million) shall be
applicable
While SEP provisions were introduced in the
background of BEPS discussions to tax DE, the
language of the SEP provisions is broad and is likely
to impact conventional transactions and activities
even if they are not carried out digitally.
Accordingly, the following business activities of
NRs, who are not covered under tax treaties, may
be impacted:
► NR businesses carrying out transactions
exceeding INR 20 million in respect of physical
or digital goods, services or property with any
person in India; regardless of whether such sale
is concluded outside India or service is
rendered outside India
► NR businesses engaging in interactions or
carrying out systematic and continuous
soliciting of business activities with 0.3 million
users; regardless of whether these activities
are carried on through digital means or
physically7
However, if the above referred activities of NR
taxpayers are covered by EL, then such income is
specifically exempted from income-tax and, hence,
will not be impacted by the expanded scope of BC
through SEP.
To recollect, the expanded scope of BC does not
override a tax treaty, which follows the traditional
PE definition. Hence, unless the tax treaty is
renegotiated and expanded through a bilateral or
multilateral instrument to include provisions similar
to SEP, the SEP provisions in the ITL will not impact
NR taxpayers from treaty jurisdictions. The
applicability of EL to such taxpayers needs separate
evaluation.

These thresholds are effective from 1 April 2022

i.e., tax year 2021-22 onwards which aligns with
the effective date of SEP provision.

Impact analysis:
By notifying the revenue and user thresholds, the
CBDT has put the SEP provisions into operation.

This will be of relevance to NR taxpayers from

countries/territories which do not have bilateral or
multilateral treaty with India dealing with double
taxation of income – it being clear that SEP nexus
rule is subject to treaty obligation. If they satisfy the
revenue or user thresholds as notified, the business
income earned from India will become taxable in
India. This will also trigger consequent procedural
provisions of tax withholding for the payer as also
filing of returns in India for the NR taxpayer.

5 of its business activities or engaging in interaction through

F. No. 370142/11/2018-TPL dated 13 July 2018
6 digital means. However, reference to “through digital
Notification No. 41 /2021/ F. No. 370142/11/2018-TPL
7 means” was deleted vide Finance Act 2020.
When SEP provision was introduced vide Finance Act
2018, it referred to systematic and continuous soliciting

Comments
For global consensus on taxation of DE, OECD is
spearheading the discussions under BEPS 2.0 project
where more than 135 countries (including India) are
participating and it is expected to be implemented
through a new multilateral instrument. Simultaneously,
the United Nations has also released a new article to
tax automated digital services which can be effective
only when incorporated into the tax treaties.
Accordingly, the new nexus rule of SEP in the ITL may
not have immediate impact for NRs from treaty
jurisdictions carrying out business activities in a
manner which does not trigger PE under the treaty.
Furthermore, if the business activities are covered by
EL, NRs from non-treaty jurisdictions may also not be
immediately impacted by SEP till the time EL remains in
operation. In its present form, SEP may impact NRs
from non-treaty jurisdictions whose business activities
are not covered by EL and breach the revenue or user
thresholds as notified.
The scope of SEP provisions in India is highly
contentious. Guidance on issues and ambiguities not
only on scope and ambit of the SEP provisions such as
applicability to “brick and mortar” transactions but also
issues related to determination of “user base” were
keenly awaited by the industry from the CBDT.
However, the present Notification only provides the
threshold limits without any guidance on practical
application. A number of practical issues arise from the
language of the notified threshold limits. For instance,
whether INR20 million revenue threshold should be
determined on gross or net of sales returns, discounts,
etc., whether the 0.3 million user-base should be of
users resident in India/IP address situated in India,
whether any distinction can be made between active
and passive users are some of such issues. Therefore,
the industry might need to continuously engage with
the CBDT for seeking guidance on various practical
aspects for implementation of SEP provisions.
Further, it was expected by the stakeholders that, while
providing the threshold of “revenue” and “users”, the
CBDT would take into account the exponential growth
of the digital industry, the size of India’s population and
growth of the internet. Accordingly, sufficient high
thresholds would be prescribed to achieve the object of
confining such levy only to large players and will be
consistent with the concept of “significant” economic
presence. However, the small revenue-threshold of
INR20 million and user-threshold of 0.3 million may
also loop in small NR taxpayers, which could place
disproportionate higher compliance burden on them
(with corresponding tax withholding compliance burden
for payers) as also higher administrative burden for the
revenue department as compared to incremental tax
revenues arising from SEP.
Once NR triggers SEP in India, only so much of income
as is attributable to the transactions or activities
covered under SEP shall be taxable in India. The CBDT
has powers to issue guidance on manner in which and
the procedure by which the income shall be arrived at if
NR has an SEP in India. In this regard, on 18 April
2019, the CBDT issued a public consultation document
on profit attribution which, inter alia, provided
guidance on profit attribution rules for SEP [8].
However, the final guideline on profit attribution is still
awaited.
Considering that SEP provisions are applicable from tax
year 2021-2022, the compliances in terms of
withholding and also furnishing of remittance
information, wherever relevant, will need to be
complied with by the payer after examining treaty
benefits, if any. Non-compliance of withholding
obligations can trigger expense disallowance and also
can have interest and penal implications in the hands of
the payer. Furthermore, the payer in India can also run
the risk of being regarded as representative assessee
of the NR. One may note that in the absence of
guidance on attribution principles for income taxable in
India pursuant to SEP provisions, the payer may need
to reach out to the tax authorities to determine the
appropriate sum which can be regarded as taxable in
order to comply with withholding provisions. Any non-
compliance with reference to transactions
consummated from 1 April 2021 to 2 May 2021 (i.e.
prior to date of notification of thresholds) may be
defended on the basis of impossibility of performance
on part of the payer.
[8] Refer
EY alert “Indian Tax Administration invites public
comments on proposal to amend rules on profit attribution to
permanent establishment” dated 1 May 2019
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