Significant Economic Presence and Business Connection in India 2026

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Under section 9(2)(c) of the Income Tax Act, 2025, a foreign company is taxable on business income accruing through an Indian business connection. Business connection includes significant economic presence. That means Indian payments above INR 2,00,00,000 in a tax year, or systematic dealings with 3,00,000 Indian users. Where a tax treaty applies and is claimed, India taxes business profits only through a PE.

This page is for foreign companies that sell into India without an Indian entity, and for their finance and tax teams. It covers business connection, the SEP thresholds, agents, the treaty override, digital businesses and a decision table. Section numbers follow the Income Tax Act, 2025.

When is a foreign company taxable in India on business income?

A foreign company pays Indian tax on business income only if the income accrues or is deemed to accrue in India. Section 9(2)(c) of the Income Tax Act, 2025 deems income arising through or from a business connection in India to accrue here. A treaty can then narrow that charge to profits of a PE.

Income of other kinds has its own rules. Section 9(5) deems interest paid by a resident to accrue in India. Sections 9(6) and 9(7) do the same for royalty and fees for technical services. Section 9(2)(d) covers gains on capital assets in India. So the business connection test matters for sales, subscriptions, commissions and advertising, not for royalties or interest.

Route to Indian tax on business income	Section of the Income Tax Act, 2025	What triggers it
Operations carried out in India	9(9)(a)(i)	Part of the business is done in India, through an office, staff or a project
Dependent agent in India	9(9)(b)(i), (ii)	A person in India concludes contracts, delivers from stock or secures orders for the foreign company
Significant economic presence	9(9)(a)(ii), 9(9)(d)	Payments from India above the threshold, or interaction with the prescribed number of Indian users
Treaty country with a valid claim	159(4) and the treaty's PE article	India taxes only profits attributable to a PE

Sources: sections 9 and 159 of the Income Tax Act, 2025.

What is a business connection under Indian tax law?

Section 9(9) of the Income Tax Act, 2025 defines business connection. It includes any business carried out in India where all or part of the operations are carried out here. It also includes a significant economic presence, and business done through a dependent agent. It replaced Explanation 2 to section 9(1)(i) of the 1961 Act.

The definition in section 9(9)(a) says business connection "includes" these cases, so the list is not closed. An Indian office, staff or project usually creates a business connection even where no agent clause applies.

A business connection is wider than a treaty PE. A foreign company can have a business connection under section 9(9) and still owe no Indian tax under a treaty. That is why our decision table below asks the treaty question before any tax is computed.

Our guide on corporate tax rates for foreign companies covers the 35 percent rate that applies once business income is taxable.

What is significant economic presence?

Significant economic presence (SEP) is a business connection that needs no office, staff or agent in India. Section 9(9)(d) of the Income Tax Act, 2025 has two limbs. One is transactions with persons in India above a payment threshold. The other is systematic and continuous soliciting of business, or interaction, with a prescribed number of Indian users.

Limb (i) covers a transaction in goods, services or property by the non resident with any person in India. It expressly includes "provision of download of data or software in India". It applies if the aggregate of payments from such transactions in the tax year exceeds the prescribed amount.

Limb (ii) covers "systematic and continuous soliciting of business activities or engaging in interaction" with the prescribed number of users in India. The text does not limit this limb to digital means, unlike the 2018 version. A business with a large Indian user base can meet it even if few users pay.

SEP applies whether or not the agreement is entered into in India. It also does not matter whether the non resident has a residence or place of business in India, or renders services here. So a server outside India and a contract signed abroad do not take a business out of SEP.

The concept first came into the 1961 Act through the Finance Act, 2018 (clause 4 of the Finance Bill, 2018), effective 1 Apr 2019. Its user limb applied only to interaction "through digital means". No thresholds were prescribed for that version. Act No. 12 of 2020 omitted it from 1 Apr 2021 and inserted the current Explanation 2A from 1 Apr 2022, without the digital means words. So SEP with thresholds first applied for AY 2022-23, to income of the year from 1 Apr 2021.

What are the SEP thresholds?

Rule 13 of the Income Tax Rules, 2026 sets the thresholds for section 9(9)(d). Payments from transactions with persons in India must exceed INR 2,00,00,000 in the tax year. The user threshold is 3,00,000 users in India. Rule 13 replaced rule 11UD of the 1962 Rules, which set the same figures from 1 Apr 2022.

SEP limb	Clause of section 9(9)(d)	Threshold	Rule now	Rule before 1 Apr 2026
Transactions in goods, services or property with persons in India, including data or software download	(i)	Aggregate payments in the tax year above INR 2,00,00,000	Rule 13, Income Tax Rules, 2026	Rule 11UD(1), from 1 Apr 2022
Systematic and continuous soliciting of business, or interaction, with users in India	(ii)	3,00,000 users	Rule 13, Income Tax Rules, 2026	Rule 11UD(2), from 1 Apr 2022

Sources: rule 13 of the Income Tax Rules, 2026; rule 11UD of the Income Tax Rules, 1962, inserted by Notification No. 41/2021 (G.S.R. 314(E)) of 3 May 2021.

Notification No. 41/2021 inserted rule 11UD as the Income Tax (13th Amendment) Rules, 2021. It came into force on 1 Apr 2022. The thresholds have not changed since.

Four practical points decide how we apply the tests:

1. The payment test is an aggregate. It adds payments from all transactions with all persons in India during the tax year, not per customer.
2. The payment test is in rupees. Neither rule 13 nor the old rule 11UD says how to convert foreign currency receipts. Our practice is to convert each receipt at the rate on its date, and use the same method every year.
3. The user test has no payment condition. On our reading, free users count if the business systematically solicits or interacts with them.
4. Either limb is enough. A business that crosses one threshold has SEP, whatever the other shows.

The Act does not define "user". We count unique Indian users the business deals with during the tax year, using login or IP data. A company that cannot count its Indian users cannot show it is below the threshold.

Which income is taxed once a business connection exists?

Only income reasonably attributable to Indian activity is taxed. Section 9(9)(f) of the Income Tax Act, 2025 limits the charge to income attributable to Indian operations or to the SEP transactions. Section 9(9)(g) adds income from Indian targeted advertising and from data collected in India.

Section 9(9)(g) treats three kinds of income as attributable to Indian operations or SEP:

1. Advertising. Income from advertisements that target a customer who resides in India or uses an Indian IP address.
2. Data. Income from the sale of data collected from a person who resides in India or uses an Indian IP address.
3. Data driven sales. Income from the sale of goods or services using such data.

Neither section 9 nor rule 13 sets a formula for how much profit is attributable to SEP. So the computation rests on the company's own analysis of functions, assets and risks. We document that analysis before the first Indian return, because a tax officer will otherwise estimate.

The tax rate for a foreign company on attributable business income is 35 percent under the First Schedule to the Finance Act, 2026. Surcharge is 2 percent above INR 1,00,00,000 of income and 5 percent above INR 10,00,00,000. Cess at 4 percent applies on top.

When does an agent in India create a business connection?

Section 9(9)(b)(i) of the Income Tax Act, 2025 sets three tests for a person in India who acts for the foreign company. Any one creates a business connection. The person concludes contracts or plays the principal role leading to them. Or the person keeps a stock of goods and delivers from it. Or the person habitually secures orders mainly or wholly for the foreign company.

The contracts limb covers three kinds of contract. They are contracts in the name of the non resident, contracts to transfer or grant use of its property, and contracts for its services. The person must act habitually.

The "principal role" wording came in through the Finance Act, 2018 (clause 4 of the Finance Bill, 2018), from 1 Apr 2019. On our reading, it aims at sales staff who negotiate every term in India while the foreign company signs abroad. The 2025 Act keeps it in section 9(9)(b)(i)(A).

An independent agent does not create a business connection. Section 9(9)(c)(i) excludes a broker, general commission agent or other agent of independent status acting in the ordinary course of business. Section 9(9)(b)(ii) removes independent status from an agent who works mainly or wholly for one non resident or its related parties.

Agent test	Indian domestic law, section 9(9)(b)	Older treaty wording, such as Article 5(4) of the India Canada DTAA	MLI Article 12 wording, where both countries adopted it
Contracts	Habitually concludes, or plays the principal role leading to, contracts	Habitually exercises authority to conclude contracts	Habitually concludes, or plays the principal role leading to, contracts
Stock of goods	Keeps stock and regularly delivers	Keeps stock and delivers, where other activity contributed to the sale	Not a separate limb
Securing orders	Habitually secures orders mainly or wholly for the non resident	Habitually secures orders wholly or almost wholly for the enterprise	Not a separate limb
Independent agent	Excluded, unless working mainly or wholly for one principal	Excluded, unless wholly or almost wholly for one enterprise and not at arm's length	Excluded, unless exclusively or almost exclusively for closely related enterprises

Sources: section 9(9) of the Income Tax Act, 2025; India Canada DTAA, Article 5(4) and (5); synthesised text of the MLI and the India Canada DTAA.

MLI Article 12 changes a treaty's agent test only where both countries adopted it. Check the synthesised text for the treaty that applies. The India Canada synthesised text, for example, does not include MLI Article 12. So the 1996 wording still governs that treaty, as our India Canada DTAA guide explains.

Which activities do not create a business connection?

Section 9(9)(c)(ii) of the Income Tax Act, 2025 lists four confined activities that do not count as business carried out in India. Section 9(9)(e) also takes transactions confined to buying goods in India for export out of the SEP test.

The four confined activities are:

1. Purchase of goods in India for export.
2. Collecting news and views in India for transmission abroad, by a news agency or publisher.
3. Display of uncut and unassorted diamonds in a notified special zone, by a foreign mining company.
4. Shooting of cinematograph films in India by specified non residents.

The list is narrow. A liaison office that only collects information or promotes a parent's products falls under FEMA rules, not this list. Its income tax position turns on the activities it actually performs. Our liaison office guide covers the permitted activities and Form 162.

Does SEP apply if the foreign company's country has a tax treaty with India?

On our reading, SEP alone does not create Indian tax for a company that validly claims a treaty. Section 159(4) of the Income Tax Act, 2025 applies the Act only where it is more beneficial. A treaty taxes business profits in India only through a PE. SEP needs no physical presence, so most SEP businesses have no PE.

The treaty route has conditions. Section 159(8) requires a TRC from the home country and the prescribed information in Form 41. The Form 41 guidance note states: "Benefit of DTAA is available only with filing of Form 41". A company that never files Form 41 is left with domestic law. SEP then applies in full. Our guide to Form 10F and the TRC covers the filing.

The PPT and GAAR can also remove the treaty. MLI Article 7(1) denies a benefit where obtaining it was one of the principal purposes of an arrangement. Section 159(6) keeps Chapter XI, the General Anti Avoidance Rule, above the treaty. A digital business routed through a shell in a treaty country is exposed to both. Our note on GAAR for foreign companies covers Chapter XI.

Question	Domestic law (no treaty, or no valid claim)	Treaty claimed with TRC and Form 41
What creates taxable presence	Business connection under section 9(9), including SEP	PE under the treaty's Article 5
Is SEP enough	Yes, above INR 2,00,00,000 or 3,00,000 users	No, unless the facts also create a PE
Agent test	Section 9(9)(b), with the principal role wording	The treaty's agent paragraph, as modified by the MLI if adopted
Income taxed	Income attributable under section 9(9)(f) and (g)	Profits attributable to the PE under Article 7
Rate	35 percent plus surcharge and cess	Domestic rate on PE profits, subject to the treaty's non discrimination article
Papers	Indian return; Form 128 for lower withholding	TRC, Form 41, no PE declaration, Form 146 for each remittance

Sources: sections 9 and 159 of the Income Tax Act, 2025; Form 41 guidance note.

The PE articles of the India Canada treaty, and of the other treaties we work with, contain no SEP rule. A treaty would need renegotiation to bring SEP into its PE article. Until then, SEP works mainly against companies from countries with no treaty, and companies that cannot or do not claim one.

What counts as a fixed place PE after the 2025 Supreme Court ruling?

A fixed place PE needs a place at the foreign company's disposal through which it carries on business. The Supreme Court decided Hyatt International Southwest Asia Ltd v Additional Director of Income Tax (2025 INSC 891, Civil Appeal No. 9766 of 2025) on 24 Jul 2025. It held that exclusive possession is not needed. Temporary or shared use of space is enough if the business is carried on through it.

The case concerned Article 5(1) of the India UAE treaty and a 20 year strategic oversight services agreement for hotels. The Court found the UAE company had pervasive and enforceable control over hotel operations, beyond policy advice. It held that the income under the agreement is attributable to the PE and dismissed the appeals. It also held that a global loss does not stop profits being attributed to an Indian PE.

The ruling matters for SEP planning in one way. A foreign company that thinks it has only SEP can still have a fixed place PE through staff who use an Indian partner's premises. Our guide on how to avoid permanent establishment risk covers the controls.

How are digital businesses affected?

SEP was written for digital businesses that earn from Indian users without an Indian office. The character of each receipt comes first. A software licence can be royalty, a live class can be a technical service, and advertising is business income. SEP matters only for the business income part.

Business model	Usual character of Indian receipts, on our reading	Domestic rule that bites	With a valid treaty claim and no PE
Online advertising sold to Indian advertisers or targeting Indian users	Business income	SEP; section 9(9)(g)(i)	Not taxable in India
Sale of data collected from Indian users	Business income	Section 9(9)(g)(ii)	Not taxable in India
End user software licence	Royalty under section 9(6) under domestic law	Section 207(2) at 20 percent on the gross, where the Government or an Indian concern pays	Not royalty under India's treaties, per Engineering Analysis (2 Mar 2021)
Subscription to a hosted platform with no licence of copyright	Business income	SEP	Not taxable in India
Marketplace commission from Indian sellers	Business income	SEP	Not taxable in India
Live online consulting or training	Possible fees for technical services	Section 9(7) and section 207(2)	Depends on the treaty's technical services article
Buying goods in India for export	Excluded	Sections 9(9)(c)(ii)(A) and 9(9)(e)	Not taxable in India

Sources: section 9 of the Income Tax Act, 2025; Supreme Court, Engineering Analysis Centre of Excellence Private Limited, 2 Mar 2021.

The end of the equalisation levy

The equalisation levy used to sit beside SEP. The Finance Act, 2016 brought in the 6 percent levy on online advertising. The Finance Act, 2020 added the 2 percent levy on e commerce supply. Section 10(50) of the 1961 Act exempted income that bore the levy. So many digital businesses paid the levy and no income tax.

The Finance (No. 2) Act, 2024 stopped the 2 percent levy for consideration on or after 1 Aug 2024. The Finance Act, 2025 stopped the 6 percent levy from 1 Apr 2025, the date the department's equalisation levy guide gives. Its equalisation levy page now states that the levy is not applicable from AY 2026-27. On our reading, with the levy gone, SEP and the attribution rules carry the charge on Indian advertising and e commerce income.

GST is a separate charge. A foreign supplier of online services to Indian consumers registers under the OIDAR rules whatever its income tax position. Our OIDAR guide and our note on GST registration for foreign companies cover that side.

How is the tax collected?

A foreign company with a business connection files an Indian return under section 263 of the Income Tax Act, 2025. It pays tax on attributable income. Indian customers paying it must also consider withholding under section 393(2), Table serial 17, on any sum chargeable to tax.

Withholding is the practical pressure point. An Indian advertiser cannot know how much of a payment is attributable income. Without a certificate, it may deduct tax on the gross amount. The foreign company can apply for a lower deduction certificate in Form 128 under section 395(1), based on its expected tax.

The customer also files Form 145 for each remittance, and Form 146 where a chartered accountant's certificate is needed. Our guide to TDS on payments to non residents covers the deduction. Our note on Form 128 covers the certificate.

How do you decide whether a foreign company is taxable in India?

Work through the questions in order. Classify the receipt first, then test for a business connection, then apply any treaty. A foreign company is taxable on business income only with a business connection. It must also lack a valid treaty claim, or have a PE.

Step	Question	If yes	If no
1	Is the receipt royalty, fees for technical services, interest or dividend under section 9(4) to 9(7)?	Apply that rule and section 207; stop here for that receipt	Go to step 2
2	Are the Indian activities confined to buying goods for export, or another activity in section 9(9)(c)(ii)?	No business connection for that activity	Go to step 3
3	Is any part of the business carried out in India, through an office, staff, a project or a dependent agent?	Business connection under section 9(9)(a)(i) or 9(9)(b); go to step 5	Go to step 4
4	Do payments from India exceed INR 2,00,00,000 in the tax year, or does the business deal with 3,00,000 Indian users?	SEP under section 9(9)(d) and rule 13; go to step 5	No business connection; no Indian tax on business income
5	Is the company resident in a treaty country, with a TRC and Form 41 filed for the tax year?	Go to step 6	Tax attributable income under section 9(9)(f) and (g) at 35 percent plus surcharge and cess
6	Does the PPT or GAAR deny the treaty benefit?	Domestic law applies; tax as in step 5	Go to step 7
7	Does the company have a PE under the treaty's Article 5?	Tax profits attributable to the PE	Not taxable in India on business profits

Sources: sections 9, 159 and 207 of the Income Tax Act, 2025; rule 13 of the Income Tax Rules, 2026; MLI Article 7.

What changed in 2026

The substance of the business connection and SEP rules did not change in 2026. The Income Tax Act, 2025 moved them from Explanations to section 9(1)(i) into clauses of section 9(9), from 1 Apr 2026. Rule 13 of the Income Tax Rules, 2026 replaced rule 11UD with the same thresholds. Our note on the Income Tax Act, 2025 changes maps the rest.

Provision	Income Tax Act, 1961 and Rules, 1962	Income Tax Act, 2025 and Rules, 2026
Income through a business connection	Section 9(1)(i)	Section 9(2)(c)
Business carried out in India; SEP as a business connection	Explanation 2 and Explanation 2A to section 9(1)(i)	Section 9(9)(a)(i) and (ii)
Dependent agent tests	Explanation 2(a) to (c)	Section 9(9)(b)(i)(A) to (C)
Agent working mainly for one principal; independent agent	Provisos to Explanation 2	Section 9(9)(b)(ii) and 9(9)(c)(i)
Confined activities, such as buying for export	Explanation 1(b) to (e)	Section 9(9)(c)(ii)(A) to (D); section 9(9)(e) for SEP
SEP limbs	Explanation 2A(a) and (b)	Section 9(9)(d)(i) and (ii)
Attribution of income	Explanation 1(a) and the proviso to Explanation 2A	Section 9(9)(f)
Advertising and data income	Explanation 3A	Section 9(9)(g)
SEP thresholds	Rule 11UD	Rule 13
Treaty more beneficial rule; treaty papers	Section 90(2); section 90(4) and Form 10F	Section 159(4); section 159(8) and Form 41
Withholding on payments to non residents; lower deduction certificate	Section 195; section 197 and Form 13	Section 393(2), Table serial 17; section 395(1) and Form 128

Sources: section 9 of the Income Tax Act, 1961 and of the Income Tax Act, 2025; rule 11UD and rule 13; CBDT form map.

What has happened since 7 Feb 2026

1. 20 Mar 2026. CBDT notified the Income Tax Rules, 2026 as G.S.R. 198(E). Rule 13 carries the SEP thresholds of INR 2,00,00,000 and 3,00,000 users.
2. 1 Apr 2026. The Income Tax Act, 2025 came into force. Tax year 2026-27 is the first year tested under section 9(9). FY 2025-26 is still tested under Explanation 2A and rule 11UD.

The equalisation levy page on incometaxindia.gov.in, checked on 23 Oct 2026, states that the levy is not applicable from AY 2026-27. Our batch note on the abolition of the equalisation levy covers its history.

Worked example

AdCo sells advertising from a country with no treaty

AdCo Limited is resident in a country that has no comprehensive tax treaty with India. It sells advertising on its app to Indian advertisers, targeting Indian users. It has no office, staff or agent in India, and its servers are abroad.

In tax year 2026-27 Indian advertisers pay AdCo USD 300,000. Assume USD 1 equals INR 88 for this example, so the payments total INR 2,64,00,000. That exceeds INR 2,00,00,000, so AdCo has SEP under section 9(9)(d)(i). The app also has 4,50,000 Indian users who log in each month, which meets limb (ii) as well.

AdCo's adviser analyses functions, assets and risks. Assume the analysis attributes 15 percent of the Indian receipts to the SEP transactions under section 9(9)(f). The 15 percent is an illustration only; no law or rule sets an attribution rate. The arithmetic then runs as follows.

Step	Amount (INR)
Payments from Indian advertisers	2,64,00,000
Income attributable to SEP at 15% (assumed)	39,60,000
Tax at 35%	13,86,000
Surcharge (income below INR 1,00,00,000)	Nil
Cess at 4%	55,440
Total Indian tax	14,41,440
Tax as a share of Indian receipts	5.46%

AdCo files an Indian return under section 263 and pays any balance. Before the first payments of the year, it applies for a Form 128 certificate. A certificate at a rate close to 5.46 percent would match the expected tax. Without one, its Indian customers may withhold on the gross payments under section 393(2).

Before the equalisation levy ended, AdCo's position was different. At 6 percent, the levy on INR 2,64,00,000 would have been INR 15,84,000. Section 10(50) of the 1961 Act then exempted the income. The levy no longer applies from AY 2026-27, so income tax through SEP takes its place.

The same business in a treaty country

Now suppose AdCo is resident in a country with a comprehensive treaty with India. It holds a TRC, files Form 41 for tax year 2026-27, and has real staff and management at home. It has no fixed place, project or agent in India.

SEP still exists under section 9(9)(d). The treaty's business profits article taxes AdCo's profits in India only through a PE. AdCo has none, so section 159(4) lets it rely on the treaty. Its Indian tax on the advertising income is nil.

The position changes if AdCo hires an Indian sales head who negotiates every advertiser contract in India. The treaty's agent paragraph may then create a PE. Where the treaty has the older wording, the test is whether the sales head habitually exercises authority to conclude contracts. Where both countries adopted MLI Article 12, the principal role test applies.

EdCo stays just below the threshold

EdCo Limited, also from a country with no treaty, sells pre recorded courses to Indian learners. In tax year 2026-27 Indian learners pay it INR 1,90,00,000, and it has 2,40,000 Indian users. Neither limb is met, so EdCo has no SEP and no business connection in India.

In tax year 2027-28 its Indian receipts grow to INR 2,10,00,000. That exceeds INR 2,00,00,000, so EdCo has SEP for that year. We track Indian receipts and users each month, so the company knows before year end which side of the line it is on.

Common mistakes

1. Assuming no office means no Indian tax. Fix: test both SEP limbs every tax year, using receipts and user data.
2. Counting the payment threshold per customer. Fix: add payments from all persons in India for the whole tax year.
3. Ignoring free users. Fix: count every Indian user the business solicits or interacts with, paying or not.
4. Claiming a treaty without Form 41. Fix: get the TRC and file Form 41 before the first Indian payment of the tax year.
5. Treating every digital receipt as business income. Fix: classify licences, technical services and advertising separately before applying SEP.
6. Letting Indian staff negotiate contracts for the parent. Fix: keep negotiation and signing authority outside India, and record who does what.
7. Leaving withholding to Indian customers. Fix: apply for a Form 128 certificate based on the expected tax.
8. Assuming the equalisation levy still covers advertising income. Fix: plan for income tax, as the levy does not apply from AY 2026-27.

Checklist

1. Classify each Indian receipt as royalty, technical fee, interest, dividend or business income.
2. List every activity the company carries out in India, including staff visits and partner premises.
3. Review whether any person in India concludes contracts, keeps stock or secures orders for the company.
4. Total the payments from persons in India for the tax year in rupees.
5. Count unique Indian users the business solicits or interacts with during the tax year.
6. Compare both figures with the rule 13 thresholds of INR 2,00,00,000 and 3,00,000 users.
7. Obtain a TRC and file Form 41 where the company is resident in a treaty country.
8. Test the arrangement against the PPT and GAAR before relying on the treaty.
9. Test for a PE under the treaty's Article 5, including the agent paragraph as modified by the MLI.
10. Document the functions, assets and risks behind the income attributable to India.
11. Apply for a Form 128 certificate before Indian customers start withholding.
12. File the Indian return under section 263 and pay the balance of tax.

To have us test a business against SEP and the treaty before launch, send the revenue split and contract flow through our contact page.

Frequently Asked Questions

What is significant economic presence in Indian tax law?+

It is a business connection that needs no office or agent in India. Section 9(9)(d) of the Income Tax Act, 2025 defines it by two limbs. One is payments from India above a prescribed amount. The other is systematic and continuous soliciting of, or interaction with, a prescribed number of Indian users.

What are the SEP thresholds in India?+

Rule 13 of the Income Tax Rules, 2026 sets them. Aggregate payments from transactions with persons in India must exceed INR 2,00,00,000 in the tax year. The user threshold is 3,00,000 users in India. Rule 11UD of the 1962 Rules set the same figures from 1 Apr 2022.

When did SEP start to apply in India?+

The current SEP test applied from 1 Apr 2022, for AY 2022-23 under the Income Tax Act, 1961. Act No. 12 of 2020 inserted that version of Explanation 2A. Notification No. 41/2021 of 3 May 2021 set the thresholds in rule 11UD from the same date.

Where is the business connection rule in the Income Tax Act, 2025?+

Section 9(2)(c) deems income through a business connection to accrue in India. Section 9(9) defines business connection. SEP sits in section 9(9)(d), agents in section 9(9)(b) and exclusions in section 9(9)(c). These replaced section 9(1)(i) and its Explanations in the Income Tax Act, 1961.

Does SEP override a tax treaty?+

No. Section 159(4) of the Income Tax Act, 2025 applies the Act only where it is more beneficial to the taxpayer. A treaty taxes business profits only through a PE, and SEP alone is not a PE. The company needs a TRC and Form 41 to claim the treaty, and the PPT can still deny it.

Is a foreign company with SEP taxed on all its Indian revenue?+

No. Section 9(9)(f) of the Income Tax Act, 2025 taxes only income reasonably attributable to the SEP transactions or Indian operations. Section 9(9)(g) treats Indian targeted advertising and data income as attributable. The attributable income bears 35 percent plus surcharge and cess.

Do free users count towards the SEP user threshold?+

On our reading, yes. Section 9(9)(d)(ii) of the Income Tax Act, 2025 covers systematic and continuous soliciting of business, or interaction, with users in India. It sets no payment condition for this limb. The rule 13 threshold is 3,00,000 users.

What is a dependent agent under section 9(9)(b)?+

It is a person in India acting for the foreign company who habitually concludes contracts or plays the principal role leading to them. It also covers a person who keeps stock and delivers from it, or habitually secures orders mainly or wholly for the company. An independent agent in the ordinary course of business is excluded.

Does SEP apply to buying goods in India for export?+

No. Section 9(9)(e) of the Income Tax Act, 2025 takes transactions confined to buying goods in India for export out of the SEP test. Section 9(9)(c)(ii)(A) gives the same exclusion for business carried out in India.

Is the equalisation levy still payable in India?+

No. The 2 percent levy on e commerce supply stopped for consideration on or after 1 Aug 2024, under the Finance (No. 2) Act, 2024. The 6 percent levy on online advertising stopped from 1 Apr 2025. The Income Tax Department's equalisation levy page states that the levy is not applicable from AY 2026-27. Indian advertising income is now taxed through SEP and section 9(9)(g).

Is SaaS revenue from India taxable under SEP?+

It can be. A subscription to a hosted platform without a licence of copyright is business income, on our reading. It falls under SEP if Indian payments exceed INR 2,00,00,000 or users reach 3,00,000. With a valid treaty claim and no PE, the business profits article keeps it out of Indian tax.

Do Indian customers have to deduct tax from payments to a foreign company with SEP?+

They must consider it. Section 393(2), Table serial 17 of the Income Tax Act, 2025 requires deduction on any sum chargeable to tax paid to a non resident. The foreign company can apply for a lower deduction certificate in Form 128 under section 395(1) to set the rate.

Does SEP apply to non residents other than companies?+

Yes. Section 9(9)(d) of the Income Tax Act, 2025 says a non resident has SEP where either limb is met. It is not limited to companies. A foreign partnership or individual that crosses either threshold meets the test in the same way.

How should a business count Indian users for the SEP test?+

Neither section 9(9)(d) of the Income Tax Act, 2025 nor rule 13 defines "user". We count unique users in India that the business solicits or interacts with during the tax year, using login and IP data. A business that cannot count them cannot show it is below 3,00,000.

Does a foreign company with SEP have to file an Indian return?+

Yes, where it has income chargeable in India. A foreign company with a business connection files a return under section 263 of the Income Tax Act, 2025 and pays tax on attributable income. A company that relies on a treaty also files where it needs to claim a refund of tax withheld.

Sources

• Income Tax Department, Section 9 of the Income Tax Act, 2025 (income deemed to accrue or arise in India), read 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-9-1
• Income Tax Department, Section 9 of the Income Tax Act, 1961 (Explanations 1, 2, 2A and 3A, with footnotes on Act No. 12 of 2020), https://www.incometaxindia.gov.in/w/section-9-61, https://www.incometaxindia.gov.in/w/section-9-59
• Income Tax Department, Rule 13 of the Income Tax Rules, 2026 (threshold for significant economic presence), https://www.incometaxindia.gov.in/w/rule-13-36
• Income Tax Department, Rule 11UD of the Income Tax Rules, 1962, https://wmstatic-prd.incometaxindia.gov.in/web/guest/w/rule-11ud
• Central Board of Direct Taxes, Notification No. 41/2021 (G.S.R. 314(E)), Income Tax (13th Amendment) Rules, 2021, 3 May 2021, https://www.incometaxindia.gov.in/documents/20117/6507196/notification_41_2021.pdf/60204c15-e4c0-272f-7e89-76c5e4701549?t=1763191664370
• Income Tax Department, Finance Bill, 2018 as introduced (clause 4, amendment of section 9), https://www.incometaxindia.gov.in/documents/20117/6475258/Finance-Bill-2018.pdf/f503f608-a886-8df7-f683-d15dc0efbbf1?t=1762782580229
• Income Tax Department, Section 159 of the Income Tax Act, 2025 (double taxation relief), https://www.incometaxindia.gov.in/w/section-159-89
• Income Tax Department, Section 207 of the Income Tax Act, 2025, https://www.incometaxindia.gov.in/w/section-207-78
• Income Tax Department, First Schedule to the Finance Act, 2026 (rates and surcharge for foreign companies), https://www.incometaxindia.gov.in/w/first-schedule-104
• Income Tax Department, Equalisation Levy, read 23 Oct 2026, https://www.incometaxindia.gov.in/w/equalisation-levy-1
• Income Tax Department, Equalisation Levy guide (levy not applicable from 1 Apr 2025), https://www.incometaxindia.gov.in/equalisation-levy3
• Income Tax Department, Guidance note on Form 41, https://www.incometaxindia.gov.in/documents/d/guest/fn-41
• Income Tax Department, India Canada DTAA (Article 5), https://www.incometaxindia.gov.in/w/canada-comprehensive-agreements-1
• Income Tax Department, Synthesised text of the MLI and the India Canada DTAA, https://www.incometaxindia.gov.in/documents/20117/6762840/Synthesised-Text-of-the-MLI-and-India-Canada-DTAA.pdf/e9360dfe-0934-bab7-bf23-8b1504b9d72a?t=1763029656107
• OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Articles 7 and 12), https://legalinstruments.oecd.org/public/doc/358/body-text.en.html
• Supreme Court of India, Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, 2 Mar 2021, https://api.sci.gov.in/supremecourt/2011/38137/38137_2011_33_1501_26629_Order_02-Mar-2021.pdf
• Supreme Court of India, Hyatt International Southwest Asia Ltd v. Additional Director of Income Tax, Civil Appeal No. 9766 of 2025, 2025 INSC 891, 24 Jul 2025, https://api.sci.gov.in/supremecourt/2024/9277/9277_2024_9_1502_62468_Judgement_24-Jul-2025.pdf