Skip to content

Direct Tax Laws and International Taxation · E-commerce Transaction and Liability in Special Cases

Significant Economic Presence and Equalisation Levy Explained

Updated 11 October 2026 · Fact-checked

Under section 9 of the Income-tax Act, 2025, a non-resident's income is taxable in India if it arises from a business connection, which includes significant economic presence (SEP). SEP arises from payments above a prescribed limit or a prescribed number of Indian users. Only income reasonably attributable to India is taxed.

Understand Equalisation Levy and Taxation of Digital Economy

A foreign digital business can sell to Indian customers without any office, staff or agent in India. Old tax rules needed a physical link. So digital businesses could earn large sums from India and pay no Indian tax.

The Act now fixes this through business connection. Section 9(9) says business connection includes business carried out in India and a significant economic presence in India. SEP does not need a place of business, a residence or any services rendered in India.

A non-resident has SEP in two ways. First, a transaction in goods, services or property with any person in India, including download of data or software, where total payments in the tax year exceed a prescribed amount. Second, systematic and continuous soliciting of business, or interaction with a prescribed number of users in India. The prescribed amount and user number are set by rules. Do not quote figures unless the question gives them.

SEP does not make all global income taxable. Only income reasonably attributable to the SEP transactions or activities, or to operations carried out in India, is deemed to accrue in India. This includes income from advertisements targeting Indian customers or accessed through Indian IP addresses, sale of data collected from persons in India, and sale of goods or services using such data.

Equalisation levy was a separate levy on digital transactions of non-residents, outside the income tax. It is not part of the section 9 text supplied here, so treat it as a separate regime that was a stop-gap before SEP. Check the current status in your study material and the latest notifications before writing about rates or scope. Purchases of goods in India for export are outside SEP.

Key rules to remember

SEP by transactions
Aggregate payments from transactions with persons in India in the tax year > prescribed amount
Covers goods, services, property and download of data or software. The amount is prescribed by rules.
SEP by users
Systematic and continuous soliciting or interaction with prescribed number of users in India
Applies whether or not the agreement is made in India or the non-resident has a place of business there.
Attribution rule
Taxable in India = income reasonably attributable to operations in India or to SEP transactions/activities
Section 9(9)(f). Not global income.
Exclusion
Purchase of goods in India for export is outside SEP
Section 9(9)(e). The independent-agent exclusion in section 9(9)(c)(i) applies only to business carried out in India. It does not remove SEP under section 9(9)(d).
Digital income included in attribution
Advertisements targeting India + sale of data from India + sale of goods/services using Indian data
Section 9(9)(g). Based on residence of customer or Indian IP address.
Indirect transfer test
Assets in India > ₹10 crore AND ≥ 50% of total assets
Section 9(10). Value is fair market value without reducing liabilities.

How to solve Equalisation Levy and Taxation of Digital Economy questions

Use this order for any question on taxing a foreign digital or e-commerce business in India.

  1. 1Confirm the person is a non-resident and the tax year is 2026-27 under the Income-tax Act, 2025.
  2. 2Identify the nature of income: business income, interest, royalty, fees for technical services, or a capital transfer.
  3. 3Test for business connection: dependent agent, stock-and-deliver agent, order-securing agent, or SEP.
  4. 4For SEP, test the payment threshold or user threshold as given in the question. If no figure is given, state the test and the prescribed limit is required.
  5. 5Check exclusions: independent agent in ordinary course, purchase of goods for export, news collection, film shooting, and similar listed cases.
  6. 6Attribute only income reasonably linked to Indian operations or SEP activities. Include advertisement and data income where listed.
  7. 7Check whether a tax treaty gives better relief, and note withholding or other related provisions.
  8. 8Conclude with a clear statement: taxable or not, and how much.

Quickest way: Three-question SEP screen

When to use it: Use in MCQs and short case questions where you must decide taxability quickly.

  1. Do the non-resident's transactions with persons in India, or its user interaction in India, exceed the prescribed limit? If no limit is stated, check whether the case says it is exceeded.
  2. Is the activity confined to buying goods in India for export, or carried out through an independent agent acting in the ordinary course? Activity confined to buying goods for export is excluded from business carried out in India, and section 9(9)(e) also keeps it outside SEP. An independent agent only means that agent's activity does not create a business carried out in India under section 9(9)(b). You must still test SEP separately under section 9(9)(d).
  3. If SEP exists, tax only the India-attributable part, not worldwide income.

Common mistakes in Equalisation Levy and Taxation of Digital Economy

  • Saying SEP needs an office or server in India

    Students carry over the old physical presence idea of permanent establishment.

    Fix: SEP applies irrespective of residence, place of business or services rendered in India.

  • Taxing the full global income of the foreign company

    The word 'business connection' sounds like total liability.

    Fix: Only income reasonably attributable to Indian operations or SEP activities is deemed to accrue in India.

  • Quoting thresholds from memory

    Students recall figures from news or older notes.

    Fix: The Act says the amount and user number are 'as may be prescribed'. Use figures given in the question.

  • Treating equalisation levy as part of income tax

    Both target digital income of non-residents.

    Fix: Treat it as a separate levy and check its present status before writing details.

  • Applying SEP to purchase of goods for export

    Students forget the exception.

    Fix: Section 9(9)(e) excludes transactions confined to purchase of goods in India for export.

  • Confusing PE with SEP

    Both create taxable presence.

    Fix: PE is mainly a treaty concept (also defined in domestic law in section 173(c)) based on a fixed place or agent. SEP is a domestic-law business connection test based on economic activity and thresholds.

Worked examples

Example 1

A non-resident foreign company with no office in India sells software downloads to Indian customers. Payments in the tax year exceed the prescribed amount. Is it taxable in India on business income?

Show the solution
  1. The company is a non-resident.
  2. Download of software to persons in India is a transaction covered by section 9(9)(d)(i).
  3. Payments exceed the prescribed amount, so SEP exists.
  4. SEP is irrelevant to whether it has a place of business in India.
  5. Only income reasonably attributable to these transactions is deemed to accrue in India.

Answer: Yes. It has SEP and hence a business connection. The India-attributable income from the transactions is taxable, not its global income, subject to any treaty.

Example 2

A foreign company buys handicrafts from Indian suppliers for export through its buying office in Jaipur. The office only purchases goods for export and does no other activity. The company makes no sales in India. Does it have a business connection?

Show the solution
  1. Identify the activity: purchase of goods in India for export, carried out through a buying office in Jaipur.
  2. The office is confined to purchasing goods for export. It does no other activity.
  3. Section 9(9)(c)(ii)(A) says a business carried out in India does not include operations confined to the purchase of goods in India for export.
  4. Section 9(9)(e) says the SEP provisions do not apply to transactions or activities confined to purchase of goods in India for export. The company makes no sales in India, so SEP does not arise.
  5. Business connection under section 9(2)(c) and section 9(9)(a)(i) is judged on the facts. The office does nothing beyond purchasing for export, so no other business connection arises.

Answer: No business connection arises from these activities, so no income is deemed to accrue in India on that basis. This holds only because the office is confined to purchasing for export.

Exam tips

  • Write the section 9(9) structure: business connection, then business carried out, then SEP, then exclusions, then attribution.
  • In case MCQs, look for words like 'confined to purchase of goods for export' or 'independent agent'.
  • Never invent threshold figures. Say 'the prescribed limit' unless given.
  • For PE versus SEP questions, give a short two-column style comparison in sentences: basis, physical link and income taxed.
  • If equalisation levy appears, state it as a separate levy and mention its status as per your updated material.

Practice questions from E-commerce Transaction and Liability in Special Cases

Equalisation Levy and Taxation of Digital Economy in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equalisation Levy and Taxation of Digital Economy: frequently asked questions

What is significant economic presence?

It is a form of business connection for non-residents based on payments from Indian transactions above a prescribed amount or on prescribed user interaction. Physical presence is not needed.

How is SEP different from permanent establishment?

PE usually needs a fixed place or a dependent agent. It is mainly a treaty concept, though domestic law also defines it in section 173(c). SEP is a domestic-law business connection test and rests on economic activity and thresholds. Treaty relief may still apply.

Is all income of a foreign digital company taxed in India under SEP?

No. Only the part reasonably attributable to Indian operations or SEP transactions and activities is taxed.

Is equalisation levy the same as SEP?

No. Equalisation levy was a separate levy on certain digital transactions, while SEP is part of the business connection rule in section 9. Check the current status of the levy in updated material.