Taxation in India of Digital Businesses by Non Residents

TAXATION IN INDIA OF DIGITAL BUSINESSES BY NON RESIDENTS

(An update based on latest PIB press release dated 12-2-2019)

To address the challenges posed by the Non Resident enterprises  conducting their business through digital means in the India remotely, the following measures have been taken under the existing law:

1.     EQUILISATION LEVY -

a)     A new levy viz. 'Equalisation Levy' was introduced by the Finance Act, 2016 for taxation of the digital economy based on OECD Base Erosion and Profit Shifting (BEPS) suggested measures.

b)    Presently, the levy is charged @ 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India, where the aggregate amount of such consideration exceeds one lakh rupees(Rs.100000) in a previous year.

c)     The Equalization Levy tax collection exceeded Rs. 550 crore for FY 2017-18.

2.     “Significant Economic Presence” OF NON RESIDENTS IN INDIA-

a)     Section 9(1)(i) of the Income-tax Act, 1961 as amended introduced the concept of "Significant Economic Presence" (SEP) for establishing "business connection" in the case of non-resident in India. Accordingly, significant economic presence shall mean–

		Based on Amount :Any 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 the amount as may be prescribed; or
		Based on number of Interactions : Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.

(Suggestions/comments of stakeholders and the general public are invited to prescribe the thresholds to establish SEP of a non-resident in India )

3.      GAAR Applicability: If digital businesses operated by non-residents are structured to artificially avoid establishment of a "business connection" or "permanent establishment" in India, including by way of claiming the activities carried out in India to be preparatory or auxiliary in nature, the GAAR provisions under the Income-tax Act may become applicable to the income of such digital businesses in India.

4.     TAX based on significant economic presence (SEP) on non residents’ income earned by digital businesses IN DTAA & NON DTAA JURISDICTION-

                 i.         If India does not have DTAA - Tax is expected to increase tax collection by establishing business connection .

               ii.         If India already has a  DTAA - However if Non resident operating out of jurisdictions with which India already has a DTAA, Tax based on SEP will only be effective after renegotiation of such DTAA which will be based on international consensus.

(This was stated by Shri Shiv Pratap Shukla, Minister of State for Finance in a written reply to a Question in Rajya Sabha ).

MSME Form 1 - Reporting of Payments Due Over 45 Days

The Central Government, vide notification number S.O. 368(E) dated 22nd January, 2019, directed that every specified company shall submit a half yearly return in MSME Form I furnishing details of outstanding payment to Micro and Small Enterprise suppliers.

Applicability

All companies shall file Form MSME-1, who:
(a) receive supplies of goods or services from micro and small enterprises; and
(b) the payment for such micro and small enterprises is due for a period exceeding 45 days from the date of acceptance of the goods or services

Definition of Micro Enterprise and Small Enterprise

As per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006:

Micro Enterprise

1. Engaged in the manufacture of goods, where the investment in plant and machinery does not exceed Rs. 25 lakhs; or

2. Engaged in providing services, where the investment in equipment does not exceed Rs. 10 lakhs.

Small Enterprise

1. Engaged in the manufacture of goods, where the investment in plant and machinery is more than Rs. 25 lakhs but does not exceed Rs. 5 crore; or

2. Engaged in providing services, where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

These entities could be any of:

- Company

- Partnership

- Association of Persons

- Hindu Undivided Family

- Co-operative Society

- Proprietorship, etc.

Information to be Reported

1. Details of Company filing the form: CIN, PAN, Address, Email ID
2. Amount due to micro and small enterprises suppliers during the filing period
3. Particulars of the suppliers:
    a) Name
    b) PAN
    c) Amount due
    d) Date since when the payment is due
4. Reasons for delay in payment

Due Date for Filing

April to September - 31st October
October to March - 30th April

First Return

Every specified company shall file in MSME Form I details of all outstanding dues to micro or
small enterprise suppliers existing on the date of notification, i.e., on 22nd January, 2019, within thirty days from the date of publication of this notification, i.e., by 21st February, 2019.

Action Points

1. For swift compliance, the company should take a declaration from all of its vendors about if they fall under the definition of Micro or Small Enterprise as per the MSMED Act.
2. After identifying micro and small enterprises, an ageing of the amount outstanding to them should be prepared.
3. In case of amounts payable to them beyond 45 days, either the same should be paid on priority, or reason for delay should be recorded which will have to be reported in such Form.

*****

Edit (12-Feb-2019)

Remarks for Filing of MSME Form:

1. The definition for MSME is investment in plant & machinery based only. The definition based on turnover is part of the MSME Amendment Bill 2018, but has not been tabled on the floor of the Lok Sabha for passing.

2. Since 2015, the Central Government has mandated obtaining of UAM (Udyog Aadhaar Memorandum). You may ask your suppliers to provide the UAM.

3. The ICAI has issued Guidance Note on reporting of outstanding payments to MSME in the Tax Audit Report. The same guidance may be applied while filing the Form MSME-1 with the ROC. There should not be any inconsistency between MSME reporting in Tax Audit Report and in Form MSME-1. The only difference would be on account of Medium Enterprises as amounts outstanding to them are not to be reported in the ROC Form yet.

4. If the vendor neither provides UAM/EM/SSI number, nor discloses whether or not it has applied for UAM within a reasonable time, then one may presume that they are not covered under the definition of MSME. However, such a disclaimer may be given in the form filed with ROC. Also, one should have documentary proof that the vendors have been asked to provide UAM, but they haven't responded or failed to provide it.

*****

Edit (15-Feb-2019)

Format of Letter to be obtained from Vendors to establish their MSME status.

The Accounts Department

<Name of Company>

<Address>                                                                                     Date:

                Sub:       Vendor Classification as per MSME Act, 2006

Dear Sir,

We certify the following details about our enterprise as requested by you.

Name
Address
PAN
GSTIN
Nature of Enterprise (Tick correct option) Also, specify nature of activity	1.       Manufacturer 2.       Trader 3.       Service Provider
Classification as per MSMED Act 2006* (Tick appropriate box)	1.       Micro Enterprise 2.       Small Enterprise 3.       Medium Enterprise 4.       None of the Above
If classified as Micro or Small Enterprise as per above, please attach self-attested copy of either of the following: a)      MSME Registration Certificate or b)      Udyog Adhaar Memorandum (UAM) or c)       Declaration confirming the same

Thanking you.

Yours sincerely,

Signature

Name:                                                               Place:

Designation:                                                       Date:

Form DPT-3 - Return of Deposits

The Ministry of Corporate Affairs, vide notification dated 22nd January 2019, has notified Companies (Acceptance of Deposits) Amendment Rules 2019, in which sub Rule 3 in Rule 16A states that every company other than government company is required to file an e-form DPT 3, furnishing details of outstanding loans or receipts which are not in the nature of deposits.

Applicability of Return of Deposits

Every company, other than government company, to which Companies (Acceptance Of Deposits) Rules, 2014 applies, shall have to file Form DPT-3.

The list of companies required to file DPT-3 is as follows.
a) Private Companies
b) Public Companies
c) Small Companies
d) Dormant Companies
e) Section 8 Companies
f) One-person Companies

Due Date of Filing Form DPT-3

The companies shall file Form DPT-3 within 90 days of publication of notification in the Official Gazette that is on or before 22nd April 2019 along with the fee as provided in Companies (Registration Offices and Fees) Rules, 2014.

Thereafter, by 30th June every year, the company has to furnish information as on 31st March of that year, being the audited balance sheet date.

Types of Outstanding Loans and Receipts to be Reported

Companies having loan whether Secured/ Unsecured or External Commercial Borrowings from:
a) Central Govt (CG), State Govt (SG), amount received from local authority or amount received from statutory authority constituted under an act of Parliament or State legislature.
b) Foreign Banks, Governments, Institutions, Corporates, Credit agencies, citizens, authorities.
c) Any banking company, SBI, Banking Institutions.
d) Public Finance institutions notified by CG, Regional Financial institutions, Insurance Companies and Scheduled Banks.
e) Amount received against issue of commercial paper or any other instrument.
f) Inter Corporate borrowings
g) Amount received towards subscription to any securities including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of securities applied for.
h) Amount received from the person who at the time of receipt was Director or relative of Director of Private Company.
i) Amount raised by the issue of Bonds and Debentures secured by first charge and Bonds or debentures compulsorily convertible into shares within ten years.
j) Amount raised by issue of non-convertible debentures not constituting any charge on the assets of company listed on recognised stock exchange.
k) Amount received from an employee of the company not exceeding his annual salary under a contract for employment with the company in the nature of non-interest-bearing security deposit.
l) Non-interest-bearing amount received and held in trust.
m) Amount received for the purpose of business of the company-

1. As an advance for supply of goods or services and such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty-five days from the date of acceptance of such advance.
2. As an advance received in connection with consideration for immovable property under an agreement. Provided that such advance is adjusted against such property.
3. As security deposits for performance of contact of supply of goods or provision of services.
4. As an advance received under long term projects for supply of capital goods except received in connection with consideration for immovable property under an agreement. Provided that such advance is adjusted against such property.
5. As an advance towards consideration for providing future services in the form of warrant or maintenance contract, if period for providing such service does not exceed five years from the date of acceptance of such service.
6. As an advance received and allowed by any sectoral regulator or in accordance with directions of CG or SG.
7. As an advance for subscription towards publication, whether print or in electronic to be adjusted against receipt of such publications.
8. Amount brought in by promoters in the form of unsecured loans.
9. Amount received by Nidhi Company under Section 406 of this act.
10. Amount received by way of subscription in respect of chit under Chit Funds Act 1982
11. Amount received under any collective investment scheme in compliance with SEBI regulations.
12. Amount of 25 Lacs or more received by start-up company by way of convertible notes, in a single transaction from a person.
13. Amount received from Alternative investment funds, Domestic venture capital funds, Infrastructure Investment trusts, Real state investment trusts, Mutual funds registered with SEBI.

Period to be Covered for Filing of DPT-3

The period which is covered for filling this return is from 1st April, 2014 to 22nd Jan, 2019.

Attachments with DPT-3

The following documents needs to be attached with the Form DPT-3.

a) Auditor’s Certificate

b) Copy of Trust Deed

c) Copy of Instrument creating charge

d) List of Depositors

e) Details of liquid assets

f) Optional attachments, if any

The form notified by the MCA can be viewed here:

http://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_DPT-3.pdf

Interim Budget 2019 - Highlights

The following are the proposed highlights of the Interim Budget announced by the Finance Minister, Mr. Piyush Goyal, on 1st February 2019.

Direct Tax

1. Individuals earning Annual Total Income up to Rs. 5 lakhs will be exempt from Income Tax.

2. Standard Deduction for Salaried Employees increased from Rs. 40,000 to Rs. 50,000

3. TDS on Rent threshold increased from the current annual rent of Rs. 1,80,000 to Rs. 2,40,000

4. Notional rent chargeable on more than one self-occupied house property is exempted for one more self-occupied house property i.e. 2 house properties can be self-occupied

5. Interest on savings account exempt under section 80TTA - exemption limit increased from Rs. 10,000 to Rs. 40,000

6. Benefits under Section 80IB has increased to one more year that is 2020.

7. Capital gains Exemptions under Section 54 to be available for two house properties.

8. Within two years, tax assessment to be done electronically.

Indirect Tax

9. Indian Customs to fully digitize Export Import transactions and leverage RFID for logistics.

10. Government has abolished duties on 36 capital goods.

11. Group of Ministers to suggest ways to reduce Goods and service Tax on home buyers. Immediate steps will be undertaken.

12. Assesses with less than Rs. 5 crore annual turnover will be allowed to file quarterly returns of GST.

Economy

13. The government has revised the fiscal deficit targets to 3.4 percent in FY 19.

14. Anti-black money measures have brought an undisclosed income amounting to Rs. 1.30 lakh crore, and 3.38 lakh shell companies were unregistered.

15. Divestment target of Rs. 80,000 crores.

16. Target for expenditure for Financial Year 2020 set at Rs. 27.84 lakh crore and capital expenditure set at Rs. 3.36 lakh crore.

17. Focus on debt consolidation along with fiscal consolidation.

Agriculture

18. Farmers occupying land less than two hectares to be offered Rs. 6,000 per year as direct transfer under Prime Minister Kisaan Samman Nidhi. The amount will be transferred directly into bank account of beneficiary farmers in three installments of Rs. 2000 each. Government has allocated Rs. 75,000 crores for this scheme.

19. Minimum Support Price (MSP) has been increased 1.5 times to fulfill the aim of doubling farm income. A fund of Rs. 60,000 crores has also been allocated to Mahatma Gandhi National Rural Employment Guarantee Act.

20. About two percent interest subsidy to be given to farmers involved in animal husbandry activities via Kisaan Credit Card Scheme.

21. All the farmers affected by natural calamities will continue to get two percent interest subsidy and an additional three percent subsidy will be paid on timely payment of loans.

22. Rashtriya Kamdhenu Aayog to be set up and separate department of fisheries created, two percent interest subsidy for those in fisheries.

Employees

23. Central Government has launched a pension scheme named Pradhan Mantri Shram Yogi Mandhan. Under this, workers in unorganized sector will get a monthly pension of Rs. 3000 per month after 60 years per month.

24. The gratuity limit has been increased from Rs. 10 lakhs to Rs. 30 lakhs.

25. The Employee Provident Fund limit has been increased from Rs. 2.5 lakhs to Rs. 6 lakhs, in case of demise of the employee.

Highlights of Companies (Amendment) Ordinance 2019

1. Commencement Certificate is mandatory now to be obtain within 6 months of Incorporation without which, it can not commence its business activity or borrow money.
2. The ROC can strike off a company if the address of Regd Office is bogus or incomplete/ improper address. 
3. Conversion of Public Ltd to Pvt Ltd matters shifted from NCLT to Regional Director.
4. Company cannot issue shares at discount - heavy penalty imposed on violation. 
5. Alteration of Authorised Capital to be intimated within 30 days, default - penalty Rs. 1000 per day or Rs. 5 Lakh, whichever is less.
6. Creation of charge filing with ROC -  time limit reduced from 300 days to 60 days. 
7. Wrong statement/ information in filing Charge forms with ROC may lead to misrepresentation and jail.
8. Annual Return should be filed within 60 days from AGM, failure to this, penalty of 100 per day to Company and directors max 5 Lakh apart from ROC delay charges is applicable. 
9. Penalty of Rs. 5 lakh to Company Secretary certifying wrong Annual Return. 
10. Explanatory statement to be given with Notice of General Meeting must contain all details as required by Law, if no detail/short detail/misleading - penalty for Company, Directors and KMP is Rs. 50,000
11. Filing of Resolutions with ROC - Penalty for delay increased. Rs. 500 for each day of delay up to a maximum of Rs. 25 Lakh
12. Filing of Balance sheet with ROC within time limit - Failure is costly for Company + Directors both. Penalty of Rs. 100 per day and Rs. 1 lakh to Company and Director each. 
13. Resignation of Auditor must be filed by the resigning Auditor within 30 days, failure to which the resigning Auditor is liable for penalty of Rs. 50,000 and Rs. 500 per day. 
14. A director can not become director in  more than 20 companies. If he continues, he becomes disqualified. 
15. Appointment of CS on payroll (Pvt Co having paid-up capital 5 crore and above) is mandatory.
16. ROC may strike off a company if subscribers have not paid initial share capital after incorporation of a Company within 6 months.