Harmonization of Significant Economic Presence applicability with Business Connection:

Harmonization of Significant Economic Presence applicability with Business Connection The Budget 2025 proposes harmonization of provisions under Section 9 of the Income-tax Act concerning the Significant Economic Presence (SEP) and its applicability to business connection in India. Key Provisions of Section 9 Section 9 of the Act specifies the conditions on which income shall be deemed to accrue or arise in India. Clause (i) of Section 9 here provides that all income accruing directly or indirectly through or from any business connection in India shall be income arising in India. Clause (b) of Explanation 1 to Clause (i) of Sub-section (1) of Section 9 lays down that income arising from a non-resident due to activities undertaken solely within India for export purpose shall not be treated as accruing or arising in India. Explanation 2A introduces the concept of Significant Economic Presence (SEP). It makes it clear that the SEP of a non-resident in India is a business connection, the last of which includes transactions conducted by a non-resident with any person in India, if they exceed specified thresholds. Need for Amendment It has been noted that because of the wide definition of SEP, by making the exclusion under Explanation 1, relating to non-residents whose operations in India are limited to the purchase of goods for export, thereby potentially overlooked, income from such operations may be wrongly considered as accruing or arising in India. Proposed Amendment To remove this anomaly, it is suggested to alter Explanation 2A of Section 9. The modification made ensures that SEP for non-residents would not be made of activities confined to the purchase of goods in India for export purposes. This alteration brings Explanation 2A at par with Explanation 1, thus removing any scope of misunderstanding. Effective Date These proposed amendments would be effective from April 1, 2026. The provisions are going to apply from the assessment year 2026-27 onwards. Consequences This amendment would further clear up the understanding on the taxability of non-residents' income and result in a proper and consistent application of the provisions under SEP. This protects non-residents involved strictly in export-oriented activities from Indian territory against improper tax consequences. It has aimed to standardize the taxing arrangement in the elimination of inconsistencies or overlapping in interpretations on major economic presence and business connection.