The Finance Bill, 2025, proposes an amendment to Section 9 of the Income-tax Act to clarify the scope of “significant economic presence” (SEP) for non-residents. Under current rules, SEP is deemed to establish a business connection in India, which may lead to taxation of non-resident entities. However, Explanation 1 to Section 9(1)(i) exempts income from transactions limited to the purchase of goods in India for export. Due to the broad definition of SEP under Explanation 2A, concerns were raised that such export-related transactions might be inadvertently taxed. To address this, the proposed amendment explicitly excludes transactions confined to the purchase of goods for export from constituting SEP. This amendment aligns SEP rules with business connection provisions and will take effect from April 1, 2026, impacting assessment year 2026-27 and beyond.
Harmonisation of Significant Economic Presence applicability with Business Connection
Section 9 of the Act provides for income which shall be deemed to accrue or arise in India. Clause (i) of section 9, inter alia, provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India.
2. Clause (b) of Explanation 1 to clause (i) of sub-section (1) of section 9 provides that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.
3. Explanation 2A to clause (i) of sub-section (1) of section 9, inter alia, provides that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose shall inter alia mean transaction in respect of any goods carried out by a non-resident with any person in India.
4. Suggestions have been received that owing to definition of significant economic presence provided in Explanation 2A, the specific exclusion provided in the case of a non-resident, for income arising through or from operations which are confined to the purchase of goods in India for the purpose of export may be denied and such income may also be treated as income deemed to accrue or arise in India.
5. It is, therefore, proposed to amend the Explanation 2A of section 9 so that the transactions or activities of a non-resident in India which are confined to the purchase of goods in India for the purpose of export shall not constitute significant economic presence of such non-resident in India. This will bring it in coherence with the Explanation 1 to clause (i) of sub-section (1) of section 9 for business connection.
6. These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years.
[Clause 4]
Extract of Relevant Clauses of Finance Bill, 2025
Clause 4 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India.
Clause (a) of Explanation 2A to sub-clause (i) of sub-section (1) of the said section provides that “significant economic presence” in India shall, inter alia, mean transaction in respect of any goods, services or property carried out by a non-resident with any person in India.
It is proposed to insert a proviso after the first proviso to the said Explanation so as to provide that the transactions or activities which are confined to the purchase of goods in India for the purpose of export shall not constitute significant economic presence in India and make consequential amendments thereto.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2025
4. Amendment of section 9.
In section 9 of the Income-tax Act, in sub-section (1), with effect from the 1st April, 2026,––
(a) in clause (i), in Explanation 2A, after the first proviso, the following proviso shall be inserted, namely:––
“Provided further that the transactions or activities which are confined to the purchase of goods in India for the purpose of export shall not constitute significant economic presence in India:”;
(b) in the second proviso, for the words “Provided further”, the words “Provided also” shall be substituted.
