Significant Economic Presence in India 2026: ₹2 Crore & 3 Lakh User Test

Quick answer: A foreign company or other non-resident can create a Significant Economic Presence (SEP) in India even without an office, employees or physical presence here. For Tax Year 2026-27, Section 9(9)(d) of the Income-tax Act, 2025 and Rule 13 of the Income-tax Rules, 2026 prescribe two alternative thresholds: more than ₹2 crore of qualifying India-linked payments, or systematic and continuous digital solicitation/interaction with at least 300,000 users in India. Crossing either threshold can create a business connection in India, subject to treaty protection and income-attribution principles.

Why Significant Economic Presence matters in 2026

SEP is India’s domestic-law nexus rule for taxing certain non-residents that conduct substantial economic activity with India without the traditional physical presence that would normally be associated with a permanent establishment. It is especially relevant to SaaS providers, digital platforms, online marketplaces, data and software businesses, remote service providers, subscription businesses and foreign enterprises selling goods, services or property to Indian customers.

The 2026 rules are particularly important because the Income-tax Act, 2025 now carries SEP in Section 9(9)(d), and the new Income-tax Rules, 2026 expressly preserve the ₹2 crore payment threshold and 300,000-user threshold. The Finance Act, 2025 also aligned the rule with the existing export-purchase carve-out so that transactions confined to purchasing goods in India for export do not create SEP.

The two SEP thresholds under the 2026 rules

A non-resident has a significant economic presence in India if either of the following tests is satisfied during the tax year:

• Payment test: aggregate payments from transactions in goods, services or property with persons in India — including downloads of data or software in India — exceed ₹2 crore during the tax year.

• User test: the non-resident systematically and continuously solicits business activities from, or engages in interaction with, 300,000 or more users in India through digital means.

The tests are alternatives. A business does not need to cross both. The statutory language also makes clear that SEP may arise irrespective of where the contract is signed, whether the non-resident has an Indian place of business, or whether services are physically rendered in India.

What changed for exporters and sourcing operations from 1 April 2026

A major practical clarification applies from 1 April 2026: transactions or activities confined to the purchase of goods in India for the purpose of export do not constitute SEP. This amendment removes an inconsistency under which a foreign buyer sourcing Indian goods for export could fall outside the traditional business-connection rule but still face an SEP concern because of payment volumes.

This carve-out should not be stretched beyond its wording. A foreign group that also provides services in India, sells to Indian customers, maintains digital user engagement, or carries out additional India-facing activities should separately test those activities.

SEP is domestic law — DTAA protection can still be decisive

Crossing the domestic SEP threshold does not automatically mean the same income is taxable in India under an applicable Double Taxation Avoidance Agreement. Most of India’s existing tax treaties continue to allocate ordinary business profits to India only when the foreign enterprise has a permanent establishment in India, subject to the wording of the specific treaty.

Accordingly, a treaty-resident foreign company may have a domestic-law business connection through SEP but still claim treaty protection if it has no Indian PE and satisfies all treaty-benefit conditions. The analysis must be treaty-specific: tax residency certificate, Form 41 where applicable, beneficial ownership and anti-abuse provisions should be reviewed before relying on a treaty position.

How much income can India tax if SEP exists?

SEP does not make the non-resident’s entire global profit taxable in India. Section 9 provides that only income reasonably attributable to the relevant Indian operations, transactions or activities is deemed to accrue or arise in India. Attribution is therefore a separate issue from nexus.

A defensible attribution analysis should consider the functions performed, assets used, risks assumed, Indian customer base, user participation, marketing intangibles, local support functions and the value of India-linked transactions. Where a foreign enterprise already has transfer-pricing or PE documentation, the SEP analysis should be coordinated with those positions rather than performed in isolation.

Practical examples

Example 1 — SaaS company: A Singapore software company earns ₹2.6 crore from Indian customers through cloud subscriptions. It has no office or employees in India. The payment threshold is crossed, so SEP can arise under domestic law. The India–Singapore DTAA and PE position must then be reviewed separately before concluding that business profits are taxable in India.

Example 2 — digital platform: A foreign platform earns only ₹80 lakh from India but has 450,000 active Indian users with continuous digital engagement. The user threshold can independently create SEP even though payments do not exceed ₹2 crore.

Example 3 — sourcing for export: A foreign retailer buys ₹15 crore of goods from Indian manufacturers solely for export and has no India-facing sales or digital user activity. The export-purchase carve-out is intended to keep those confined sourcing transactions outside SEP.

Who should run an SEP review now?

• Foreign SaaS, cloud, data and software businesses with Indian customers.

• Online marketplaces, platforms, gaming and subscription businesses with significant Indian users.

• Foreign consultants and remote service providers earning material India-linked revenue.

• Overseas groups selling goods or services into India without an Indian subsidiary or branch.

• Foreign businesses relying on a “no permanent establishment” position under a DTAA.

• Indian finance teams making substantial payments to overseas group entities or vendors.

2026 SEP compliance checklist

• Map India-linked revenue by customer, service, product and payment source.

• Track Indian user counts and document the methodology used to identify users in India.

• Separate pure export-purchase sourcing from other India-facing activities.

• Review the applicable DTAA and test whether a permanent establishment exists.

• Maintain a current TRC and Form 41/other treaty documentation where applicable.

• Prepare a reasoned income-attribution analysis if SEP exists under domestic law.

• Coordinate SEP with transfer pricing, withholding tax, GST and equalisation-levy legacy positions where relevant.

• Document the conclusion annually because payment values, user counts and business models can change.

Common mistakes foreign businesses should avoid

• Assuming that no Indian office automatically means no Indian income-tax nexus.

• Testing only revenue and ignoring the separate 300,000-user threshold.

• Treating SEP and permanent establishment as the same concept.

• Assuming the export-purchase exemption protects wider India activities beyond sourcing goods for export.

• Failing to preserve evidence supporting user-location counts, treaty residence and attribution methodology.

FAQs

Is the ₹2 crore SEP threshold a tax-free exemption?

No. It is a nexus threshold. Once the statutory test is crossed, the next questions are whether income is attributable to the Indian SEP and whether an applicable DTAA restricts India’s taxing rights.

Does a foreign company need an Indian permanent establishment for SEP?

No under domestic law. SEP can exist even without a residence, place of business or physical rendering of services in India. Treaty protection may still depend on whether a PE exists under the relevant DTAA.

Does every Indian user count toward the 300,000-user test?

The rule refers to users with whom systematic and continuous business activities are solicited or who are engaged in interaction. Businesses should use a consistent, supportable methodology rather than relying only on raw website traffic.

Are purchases from India for export covered by SEP?

Transactions or activities confined to purchasing goods in India for export are expressly carved out from SEP from 1 April 2026. Other India-facing activities must still be tested separately.

Can DTAA relief override SEP?

Potentially yes. SEP is a domestic-law business-connection rule. Where a valid treaty applies, the treaty’s business-profits and permanent-establishment provisions may provide a more beneficial result, subject to eligibility and anti-abuse rules.

Primary sources and related PGT reading

Income-tax Act, 2025, Section 9: https://www.incometaxindia.gov.in/w/section-9-1

Income-tax Rules, 2026, Rule 13 (SEP thresholds): https://www.incometaxindia.gov.in/documents/81799/11848482/En-Notified-IT-Rules-2026-20-03-2026.pdf

CBDT non-resident guidance: https://www.incometaxindia.gov.in/w/provisions-of-income-tax-law-and-fema-useful-for-non-residents

Related PGT guide — Foreign Service Payments from India: https://www.pgtandassociates.com/post/foreign-service-payments

Related PGT guide — Foreign Company Tax Audit in India: https://www.pgtandassociates.com/post/foreign-company-tax-audit

How PGT & Associates can help

Foreign businesses entering or scaling in India should review SEP before assuming that the absence of a physical office eliminates Indian income-tax exposure. PGT & Associates can assist with SEP and PE reviews, DTAA analysis, withholding-tax positions, income attribution and cross-border compliance. Advice should be based on the specific business model, contracts, payment flows and treaty facts; this article is general information and not a substitute for professional advice.