The Income Tax Bill, 2025, is likely to introduce a major change in how foreign digital businesses are taxed in India.

The Bill, which is set to be tabled in the Lok Sabha tomorrow, is likely to expand the 'Significant Economic Presence' (SEP) principle.

SEP is a concept introduced in India’s tax framework to tax foreign digital businesses that earn from Indian consumers without having a physical presence in the country. It ensures that multinational corporations providing digital services to Indian users pay taxes in India, even if they do not have an office or a permanent establishment (PE) in the country.

Traditionally, corporate taxation is based on physical presence (i.e., companies pay taxes in countries where they have offices, factories, or employees). However, with the rise of the digital economy, companies such as Google, Facebook (Meta), Amazon, and Netflix earn billions from Indian users but pay little or no tax because they do not have a significant physical presence in the country.

To address this loophole, the Indian government introduced the SEP rule in 2018 under Section 9(1)(i) of the Income-tax Act. The same is likely to be further expanded in the Income Tax Code Bill, 2025, ensuring foreign digital companies contribute to India's tax revenue.

Netflix, Amazon, Meta under tax radar?

With this provision, foreign digital companies will be taxed if they earn from Indian consumers. Any company offering digital services, content, or e-commerce to Indian users will now be liable to pay income tax in India, even if they do not have an office or subsidiary in the country.

This applies to companies providing streaming services (Netflix, Spotify), e-commerce platforms (Amazon, Shein), gaming platforms, and social media giants (Meta, X).

Tax threshold

The Bill may contain thresholds—revenue and user-based—to make a foreign digital company liable to pay tax in India. Under the revenue threshold, if a company earns more than ₹2 crore (approximately $250,000) annually from Indian users, it will come under the tax net, according to sources. While under the user-based threshold, companies having more than 300,000 users in India will come under the tax net.

Widening the net

Digital tax is likely to apply to online marketplaces and e-commerce platforms (Amazon, eBay, Shein), streaming platforms (Netflix, Prime Video, Spotify, YouTube Premium), online gaming and betting apps (Dream11, PokerStars, PUBG, Fortnite), social media and digital advertising (Meta, X, LinkedIn), cloud services, and SaaS platforms (AWS, Google Cloud, Microsoft Azure, Zoom, OpenAI).

Under the provisions of the Bill, 6% equalisation levy on foreign digital services is also likely to be extended to SaaS platforms, digital consultation services, and AI-powered services such as ChatGPT or Midjourney.