Significant economic presence

Hey Sanket! Great question about Significant Economic Presence (SEP) and its impact on your imports.

Quick recap of SEP:

• SEP rules deem a non-resident to have a "business connection" in India if they have a significant economic presence, even without a physical presence.

• This makes income attributable to such transactions taxable in India.

• SEP criteria typically look at number of users, transaction amounts, or systematic interactions with Indian residents.

Does SEP apply to your foreign supplier for raw materials import?

Generally, import of goods (like raw materials) from a foreign supplier is treated as a purchase transaction, not a "business connection" under SEP. Here's why:

• SEP primarily targets digital or service transactions where a non-resident engages actively with Indian users/customers.

• Merely selling goods and receiving payment from India usually does not trigger SEP.

• So, if your foreign supplier only sells goods and does not have digital presence or services targeting India, SEP is unlikely to apply to them.

But what about safeguards and compliance?

1. Verify the nature of supplier’s activities:

   • If your supplier also provides digital services or has a significant online business interacting with Indian users, SEP might apply.

2. Check if TDS (Tax Deducted at Source) applies:

   • Even if SEP triggers, TDS might be applicable on payments to non-resident.

   • Typically, import of goods is not subject to TDS, but import of services or royalties might be.

3. Obtain and keep proper documentation:

   • Make sure you have invoices clearly stating it’s a supply of goods.

   • Collect a certificate of residence or tax residency proof from the foreign supplier to claim any applicable Double Taxation Avoidance Agreement (DTAA) benefits.

4. Consult your tax advisor for complex cases:

   • If the foreign supplier has any digital or service components, get expert advice to evaluate SEP impact.

Summary for your case: