A foreign company can operate in India without opening an office, hiring employees, or setting up a branch. Yet, if it has substantial business interactions with Indian customers or users, it may still have tax obligations in India through Significant Economic Presence (SEP). 

India introduced SEP to address business models where companies can earn significant revenue from India without maintaining a physical presence. 

In this blog, we explain when SEP applies, what happens when a business meets the SEP threshold, and what foreign businesses need to consider for tax compliance. 

What Is Significant Economic Presence in India?

Significant Economic Presence (SEP) is a tax concept introduced under the Income-tax Act, 1961 (previously governed by Explanation 2A to Section 9(1)(i)). Under the Income-tax Act, 2025, the corresponding SEP provisions are now codified under Section 9(9). 

SEP applies when a foreign company meets certain conditions based on its business transactions or interaction with customers and users in India. When these conditions are met, the SEP can create a business connection in India. The income linked to those Indian activities may then be taxable in India. 

When Does Significant Economic Presence Apply in India?

A foreign company with a branch office in India generally needs to maintain and audit accounts for its Indian operations. This audit covers the income, expenses, assets, liabilities and transactions connected with the Indian branch. These audited accounts are useful for tax filing, company law filing, parent-company reporting and regulatory compliance.

1. When Indian Transactions Cross the Prescribed Threshold

Under the current rules, SEP can arise when a non-resident’s aggregate payments from transactions involving goods, services or property with persons in India exceed ₹2 crore during the tax year. 

The rule also covers certain digital transactions, including the provision or download of data or software in India. 

2. When a Business Engages With Indian Users

SEP can also apply when a non-resident systematically and continuously solicits business activities or engages with 3 lakh or more users in India. 

This condition is particularly relevant to digital platforms and online businesses that have a large user base in India without maintaining a physical office in the country. 

Note: Activities limited to purchasing goods in India for export outside the country are excluded from the scope of SEP and do not create a business connection in India.  

What Happens When a Business Meets an SEP Threshold?

Meeting an SEP threshold can create a business connection in India for a foreign company. However, it does not mean that the company’s entire global income becomes taxable in India. 

The next step is to determine the income attributable to the Indian business connection. 

1. Only Income Attributable to India Is Considered

India does not automatically tax the foreign company’s worldwide income. The focus is on the income that can be reasonably attributed to the transactions or activities that create the business connection in India. 

For example, a foreign SaaS company may have customers in India, Singapore, the UK and the US. If its Indian activities meet the SEP conditions, this does not automatically make its revenue from Singapore, the UK or the US taxable in India. 

2. The Business May Have Tax and Compliance Obligations

Once a foreign business has potential Indian tax exposure, it should assess the applicable tax and reporting requirements based on its specific facts.

This may include reviewing its Indian transactions, income attribution, tax filings, withholding tax requirements, and supporting documentation. 

A direct tax review can help businesses understand these obligations and maintain the records needed to support their tax position. 

3. Related-Party Transactions May Require Further Review

If the foreign company has related-party transactions connected with its Indian business, it may also need to consider transfer pricing requirements. 

This can involve reviewing the functions performed, assets used, risks assumed, and pricing of transactions between related entities. 

Transfer pricing advisory can help businesses document these transactions and support their pricing position under Indian tax rules. 

How Does a DTAA Affect SEP Taxation?

A foreign company that meets the SEP conditions should also check whether India has a Double Taxation Avoidance Agreement (DTAA) with its country of residence.

Under Section 90(2) of the Income-tax Act, where a DTAA applies, the taxpayer can rely on the treaty provisions when they are more beneficial than the provisions of Indian tax law.

This is important because many DTAAs use Permanent Establishment (PE) as a key condition for taxing the business profits of a foreign company in India. A company may therefore have a business connection under India’s domestic SEP rules but still need to check whether the applicable DTAA limits India’s right to tax those profits.

For example, a foreign company may meet the SEP conditions while having no PE in India. Depending on the specific DTAA and the company’s facts, the treaty may limit India’s right to tax its business profits.

However, treaty protection is not automatic. The company must meet the conditions of the relevant DTAA and maintain the required documentation, which may include a Tax Residency Certificate (TRC) and Form 10F, where applicable.

Businesses should also consider anti-avoidance rules, including the Principal Purpose Test (PPT) and India’s General Anti-Avoidance Rules (GAAR). These rules can affect the availability of treaty benefits in certain arrangements. 

If the company’s country of residence does not have an applicable DTAA with India, it cannot rely on treaty protection. The business must then assess its tax position under India’s domestic tax rules. 

For businesses with significant activity in India, cross-border tax advisory can help assess SEP exposure, treaty eligibility, PE risk, documentation, and the resulting Indian tax position.

What Should Businesses Do After SEP Exposure Arises?

If a foreign business meets an SEP condition, it should review its Indian activities and tax position instead of waiting until the tax filing deadline. 

  • Maintain Accurate Revenue and User Tracking: Use international accounting support and financial reporting to track transactions with Indian customers, Indian users, and other relevant activities against the applicable SEP thresholds. 
  • Build a Defensible Income Attribution Model: Identify the income reasonably attributable to the Indian business connection and maintain records showing how the relevant functions, assets, risks, and activities contribute to that income. 
  • Prepare Treaty Documentation Early: Where a DTAA applies, maintain the required documentation, including the Tax Residency Certificate (TRC) and Form 10F, where applicable. Reviewing the treaty position early can also help Indian customers determine the appropriate withholding treatment and reduce avoidable TDS-related cash-flow issues. 
  • Evaluate the Long-Term India Operating Model: If Indian business activity continues to grow, the company should assess whether its existing offshore structure remains suitable. Depending on its business model and operational needs, options may include incorporating an Indian subsidiary, establishing a Global Capability Centre (GCC), or adopting another appropriate India entry structure.  

Final Thoughts

For overseas businesses, having no physical office in India does not by itself remove the need to assess Indian tax exposure. As digital business models grow, Indian customers, users, revenue and cross-border transactions can all affect the overall tax position. 

Addressing SEP exposure early can help businesses avoid unexpected tax costs, documentation gaps, and compliance issues. With the right cross-border tax planning, income attribution and DTAA review, finance teams can make better decisions and build a stronger foundation for growth in India. 

FAQ'S

Yes. SEP can apply even when a foreign company has no office, branch, or traditional physical presence in India, provided it meets the prescribed conditions. 

Meeting an SEP condition can create a business connection in India. The business must then assess the income attributable to its Indian activities and determine the applicable tax and compliance requirements. 

No. Meeting an SEP condition does not automatically make the company’s entire worldwide income taxable in India. The focus is on income attributable to the relevant Indian business connection. 

A foreign company should examine the applicable DTAA because treaty provisions can provide more beneficial treatment than domestic tax law under Section 90(2), subject to the treaty’s conditions. 

Not automatically. The company must examine the specific DTAA, its income, treaty conditions, anti-avoidance provisions, and other applicable rules.