Digital Economy Taxation under Income-tax Rules 2026

Digital Economy Taxation under Income-tax Rules 2026: Understanding Significant Economic Presence (SEP)

India has introduced clearer rules for taxing digital businesses that earn income from the Indian market without maintaining a physical office in the country. These provisions appear in the Income-tax Rules 2026, notified through Notification No. 22/2026 (G.S.R. 198(E)).

The rules support the framework created under the Income-tax Act 2025, particularly the concept of Significant Economic Presence (SEP). The objective is to ensure that foreign digital companies generating substantial economic activity in India can be brought within the Indian tax net, even if they do not maintain a traditional physical presence in the country.

1. Thresholds for Significant Economic Presence

Under Rule 13 of the Income-tax Rules 2026, a non-resident enterprise may be considered to have a Significant Economic Presence in India if either of the following thresholds is crossed during a financial year.

Transaction Threshold

If the total payments arising from transactions involving goods, services, or property between the non-resident and persons in India exceed: ₹2 crore during the financial year

These transactions can include online services, digital downloads, or access to software and other electronically delivered products.

User Threshold

SEP may also arise if the non-resident enterprise systematically solicits business or engages in continuous interaction with: 300,000 (3 lakh) or more users located in India

This recognizes that user participation itself can generate economic value in many digital business models.

Importantly, crossing either threshold may create a taxable business connection in India.

2. Digital Businesses Most Likely to Be Affected

The SEP framework mainly applies to businesses that can operate in India digitally without maintaining offices, staff, or infrastructure within the country.

Typical examples include:

Technology Platforms and SaaS Providers

Global software companies offering subscription-based software or cloud services to Indian customers.

Streaming and Digital Media Platforms

International OTT platforms generating subscription revenue from Indian audiences.

E-commerce Marketplaces

Foreign online marketplaces facilitating sales to Indian consumers.

Digital Advertising Platforms

Companies earning revenue from advertisements targeted at Indian users.

Such business models rely heavily on data, user interaction, and remote service delivery, which is why traditional physical-presence rules are insufficient to determine taxation.

3. How Income May Be Attributed to India

Once SEP is triggered, the next step is determining the portion of income that can reasonably be attributed to Indian operations.

Because digital companies operate across multiple jurisdictions, the rules do not prescribe a rigid formula. Instead, tax authorities may determine attribution using practical and reasonable methods, such as:

examining revenue derived from Indian customers
evaluating user participation and interaction levels
applying reasonable profit attribution principles based on available data

The aim is to identify the share of global profits that is economically connected to activities carried out in India.

4. Record-Keeping and Digital Compliance

The rules acknowledge that many businesses maintain their accounts electronically.

Where books of account are kept in digital form, they must remain accessible for tax authorities when required. The rules also emphasize proper maintenance of electronic records and backups to ensure that information can be produced during tax assessments or audits.

This reflects a broader move toward digitized tax compliance and record-keeping in the Indian tax system.

5. Other Digital-Economy Provisions in the 2026 Rules

While SEP focuses on taxing foreign digital enterprises, the 2026 rules also clarify compliance for several other rapidly growing digital sectors.

Online Gaming

Under Rule 135, the rules introduce a formula for computing net winnings from online gaming for the purpose of tax deduction at source.

This ensures that taxation applies to the net gain of a player, rather than to every individual game outcome.

Virtual Digital Assets

Transactions involving virtual digital assets such as cryptocurrencies continue to be taxed under provisions introduced through earlier finance legislation. Reporting mechanisms are increasingly integrated into the tax information framework and financial reporting systems.

Digital Payments and Electronic Transactions

The rules also recognize the growing importance of digital payment systems and electronic financial records, which play an expanding role in tax reporting and compliance.

SEP Thresholds at a Glance