Significant Economic Presence Law Bangalore | SEP digital tax Section 9 in India
A US-based SaaS company sells subscription software to Indian businesses. No Indian office, no employees in India, no permanent establishment under the India-US treaty. Revenue from Indian customers crosses INR 50 crore in a year and the user base on the platform exceeds 4 lakh Indian users.
The company assumes that without a PE, India has no taxing rights over its Indian-source revenue. The Indian tax authority assesses the company under the Significant Economic Presence provision, treating it as having a “business connection” in India and attributing profit to that connection.
The treaty does, in fact, protect the company from full SEP exposure, but it protects through the PE article, which has to be invoked and analysed. SEP in India is the digital-economy nexus rule that operates regardless of physical presence, and the treaty protection works only if proper analysis is done.
For foreign digital businesses serving Indian customers, understanding Significant Economic Presence Law Bangalore can help identify potential Indian tax exposure before the business crosses statutory thresholds.
What Is SEP and How Does It Operate Under the Income-tax Act, 2025?
Significant Economic Presence is a statutory nexus rule originally introduced under Section 9(1)(i) of the Income-tax Act, 1961 (Explanation 2A) and now codified under Section 9(8)(d) of the Income-tax Act, 2025, with operational thresholds under Rule 13 of the Income-tax Rules, 2026.
The provision deems a non-resident to have a “business connection” in India if specified thresholds of either transaction value or user engagement are met, regardless of whether the non-resident has any physical presence, office, or agent in India.
The SEP digital tax Section 9 in India framework therefore focuses on the economic connection with India rather than simply asking whether a foreign company has a physical office or employees in the country.
The Thresholds
SEP is triggered where, in a financial year, either:
Aggregate payments from transactions in goods, services, or property (including data downloads or software) carried out by the non-resident with persons in India exceed INR 2 crore (Rs 20 million), OR
The non-resident undertakes systematic and continuous solicitation of business activities or engages with 3,00,000 (3 lakh) or more Indian users through digital means.
Either threshold alone is sufficient. The transaction-value threshold is broadly applicable across all transactions, not just digital ones. The user-engagement threshold is the digital-economy specific addition.
Exclusion for Export Purchases
The Finance Act, 2025 clarified that transactions confined to purchasing goods in India for export are excluded from the SEP framework. This addresses the concern that procurement-only operations of foreign companies should not be caught.
Income Attribution
Once SEP is established, income attributable to the SEP is taxable in India. The income attribution principles follow the principles applicable to PE attribution, including transfer pricing analysis of the deemed presence’s contribution to global profit.
How Does the Treaty Interaction Actually Work?
SEP is a domestic-law concept. India’s tax treaties continue to use the Permanent Establishment concept, which has a narrower scope (generally requiring fixed place, agency authority, or extended service presence, with no equivalent to the SEP user-engagement threshold).
Where a non-resident is from a treaty country, the question is which provision governs: the broader domestic SEP or the narrower treaty PE.
The general principle is that treaty provisions override less favourable domestic law where the taxpayer chooses to apply the treaty. Section 90(2) of the Income-tax Act, 1961 (and equivalent under the 2025 Act) provides that the more beneficial of treaty or domestic law applies to the non-resident.
A treaty-protected non-resident from a country without a “digital PE” article in its DTAA can typically resist SEP characterisation by invoking the PE article of the treaty.
The protection requires:
A valid Tax Residency Certificate (TRC) for the treaty country.
Form 10F filing.
A factual basis for the position that no PE exists under the treaty.
For non-treaty country businesses, no such protection exists. SEP applies directly under domestic law, and income attributable to the SEP is taxable at the rate applicable to foreign companies (currently 35% plus surcharge and cess).
SEP in India has its sharpest bite for non-treaty country businesses.
The interaction with Pillar Two. Some treaty partners are reviewing whether existing PE articles should be modernised to capture digital activity. The OECD’s Pillar One proposal was intended to address this, but with the US having stepped back from Pillar Two implementation in early 2026 and Pillar One’s prospects uncertain, the international consensus position is in flux.
India’s SEP remains its primary domestic tool for digital tax until a multilateral solution is reached.
Understanding Significant Economic Presence Law Bangalore is particularly important for treaty-based businesses because the domestic SEP rules and treaty PE provisions need to be analysed together.
Who Is Actually at Risk and What Should They Do?
E-commerce, SaaS, and Digital Services Businesses
Foreign companies serving Indian customers through online platforms, app marketplaces, subscription services, or cloud platforms are at structural SEP risk. The 3 lakh user threshold is low for any meaningful consumer-facing digital business, the INR 2 crore revenue threshold is also low.
Foreign Professional Services
Where a foreign consulting or professional services firm has a significant Indian client base served remotely (without on-site staff above PE thresholds), the SEP can be the alternative nexus point. The revenue threshold may be the operative trigger here.
Foreign Manufacturers and Traders Selling Into India
Where physical goods are sold to Indian customers without a permanent establishment, the SEP transaction-value threshold can be triggered. The export-purchase exclusion provides relief for procurement structures but not for sales structures.
What to Do
First, monitor revenue and user engagement against thresholds annually. The thresholds are statutory and require contemporaneous tracking.
Second, where SEP is or may be triggered, evaluate treaty protection. TRC and Form 10F should be in place. The position memo should analyse PE under the relevant treaty.
Third, where treaty protection is unavailable (non-treaty jurisdiction) or uncertain, plan for the Indian tax compliance: registration, return filing, profit attribution analysis, and withholding tax mechanics on payments from Indian customers.
SEP in India is no longer a theoretical provision, the framework is operational and enforcement has begun.
The SEP digital tax Section 9 in India framework therefore requires foreign businesses to monitor their Indian transactions and user engagement rather than relying only on the absence of a physical office or PE.
Frequently Asked Questions
Q1. Does SEP Create an Obligation for Indian Customers to Deduct Tax at Source?
Indian customers paying non-residents are required to consider Section 195 withholding obligations on the basis of the chargeability of the recipient’s income.
Where SEP is triggered and treaty protection is unavailable, the recipient’s income is chargeable in India and Indian customers should withhold accordingly.
Indian customers caught between conflicting positions (recipient claims treaty protection, tax authority disputes) face their own risk and typically seek a nil-withholding certificate or a lower rate based on documentation.
Q2. How Is SEP-Attributable Income Computed?
The income attribution principles draw from the OECD’s PE attribution approach (the AOA), treating the SEP as if it were a separate enterprise dealing at arm’s length with the rest of the non-resident.
This requires functional analysis (what activities are attributable to India), comparable benchmarking (what margin would an independent comparable earn), and allocation of profits. The mechanics overlap heavily with TP analysis.
Q3. Is the Equalisation Levy Still Applicable to SEP-Triggered Transactions?
No. The 6% equalisation levy on online advertising was abolished with effect from 1 April 2025, and the 2% equalisation levy on e-commerce was abolished with effect from 1 August 2024.
The Indian digital tax framework now operates through SEP (and the broader business connection / PE framework) rather than through the equalisation levy.
Q4. Can a Foreign Company Opt Out of SEP by Restructuring Its India-Facing Activities?
There’s no formal opt-out. Restructuring to fall below thresholds (e.g., dividing customer base across multiple entities, reducing user count) is risky if it lacks commercial substance, GAAR may apply.
The cleaner path is to ensure proper treaty position where the entity is treaty-resident, and to plan for Indian tax compliance where treaty protection is unavailable.