The Evolution of Digital Tax Nexus: A Doctrinal and Jurisprudential Examination of Significant Economic Presence (SEP) Under Indian Income Tax

Abstract

The growth of the digital economy has led to the transformation of the process of creating value by multinational corporations in jurisdictions where no physical presence exists. International taxation rules such as the concept of Permanent Establishment have failed to keep pace with the taxation needs of the contemporary business environment and have thus proved to be inadequate. In an attempt to overcome these issues, India has come up with a new concept called Significant Economic Presence (SEP) to create a tax liability nexus by virtue of economic activity and not physical presence. The concept of SEP has been brought into force via the Finance Act, 2018 and the Income-tax Act. The following paper is an analysis of the legal evolution of digital tax nexus via SEP within the realm of Indian income tax law. It will examine the statutory provisions for SEP, the relation between the concepts of SEP and international tax laws, as well as the relation between the concept of SEP, DTAAs, OECD Base Erosion and Profit Shifting (BEPS) Project and the OECD/G20 Inclusive Framework on Digital Taxation. Although the SEP is a more progressive concept than the source-based system of taxation, which takes into account the value-based digital taxation approach, it needs a high level of coordination and harmonization with regard to legislative frameworks. The article provides suggestions for reforming the digital taxation legislation in India while ensuring legal certainty and sustainable fiscal outcomes in the digital age.