Harmonisation of Significant Economic Presence applicability with Business Connection by Finance Bill 2025
The Finance Bill, 2025, proposes several key changes in the Income Tax Act, 1961, to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing1 various provisions. Here are some of the key changes:
Business Connection: The Finance Bill, 2025, aims to harmonize the applicability of Significant Economic Presence (SEP) with the concept of Business Connection in India for non-residents.
Section 9 of the Income Tax Act: This section deals with income deemed to accrue or arise in India, including income from a business connection in India.
Export Exclusion: Currently, there is an exclusion for non-residents for income arising from the purchase of goods in India solely for export purposes. This income is not considered to accrue or arise in India.
SEP and Business Connection: The introduction of SEP created some ambiguity. SEP can constitute a business connection, and its definition includes transactions related to goods with any person in India.
Amendment to Explanation 2A: To clarify this, the Bill proposes to amend Explanation 2A of Section 9. It clarifies that transactions or activities confined to the purchase of goods in India for export will not constitute SEP.
Alignment with Existing Provisions: This amendment ensures that the SEP provisions are aligned with the existing exclusion for export-related income under Explanation 1 to Section 9.
Effective Date: This change will take effect from April 1, 2026, and will apply to the assessment year 2026-27 and subsequent years.
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]