Clause 9 Income deemed to accrue or arise in India.

Income Tax Bill, 2025

1. Introduction

Clause 9 of the Income Tax Bill, 2025, represents a significant statutory provision that establishes the framework for determining when income is deemed to accrue or arise in India. This provision is fundamental to India's international taxation regime and defines the territorial nexus required for taxing various forms of income earned by non-residents.

2. Objective and Purpose

The primary objectives of this provision are:

• To establish clear criteria for determining the territorial nexus of income with India
• To prevent tax avoidance through artificial arrangements
• To align Indian tax law with international taxation principles
• To address challenges posed by the digital economy
• To provide certainty in cross-border transactions

3. Detailed Analysis

3.1 Basic Framework (Sub-sections 1 and 2)

The provision establishes four primary categories of income deemed to accrue in India:

• Income from assets/sources in India
• Income from property in India
• Income from business connections in India
• Income from transfer of capital assets situated in India

3.2 Specific Categories of Income

a) Salary Income (Sub-section 3):

• Services rendered in India
• Leave period connected with Indian service
• Government payments to Indian citizens for overseas services

b) Dividend Income (Sub-section 4):

• All dividends paid by Indian companies deemed to accrue in India

c) Interest Income (Sub-section 5):

• Interest paid by government
• Interest paid by residents (with specific exceptions)
• Interest paid by non-residents for Indian business

d) Royalty Income (Sub-section 6):

• Comprehensive definition covering various intellectual property rights
• Includes software licensing and technical information
• Special provisions for digital rights and computer software

e) Technical Service Fees (Sub-section 7):

• Covers managerial, technical, and consultancy services
• Excludes construction and assembly projects

3.3 Business Connection Provisions (Sub-section 8)

The provision introduces modern concepts including:

• Traditional business connection tests
• Significant Economic Presence (SEP) concept
• Digital business considerations
• Attribution rules for partial operations

3.4 Indirect Transfer Provisions (Sub-section 9)

Detailed rules regarding:

• Substantial value derivation test
• Threshold limits and valuation methods
• Exemptions for portfolio investors
• Special provisions for small shareholders

4. Practical Implications

4.1 For Businesses

• Need to evaluate digital presence in India
• Review of existing business structures
• Compliance requirements for cross-border transactions
• Impact on international operations

4.2 For Tax Administration

• Enhanced tools for taxing digital businesses
• Clearer framework for determining taxable nexus
• Improved mechanisms for international taxation

4.3 For Foreign Investors

• Understanding of Indian tax liability
• Planning considerations for investments
• Compliance requirements
• Available exemptions and safeguards

5. Comparative Analysis

The provision aligns with international taxation principles while incorporating unique features:

• OECD BEPS recommendations integration
• Digital economy taxation measures
• Comprehensive source rules
• Special provisions for fund managers

6. Conclusion

Clause 9 represents a comprehensive framework for determining deemed accrual of income in India, balancing traditional concepts with modern business realities. It provides necessary tools for taxing digital economy while maintaining certainty for traditional businesses.

 

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Full Text:

Clause 9 Income deemed to accrue or arise in India.

Deemed accrual of income expands India's tax nexus to digital activities and indirect transfers, affecting cross-border taxpayers. Clause 9 establishes when income is deemed to accrue or arise in India, categorising taxable flows from Indian assets/sources, property, business connections and transfers of capital assets situated in India, and prescribing specific rules for salary, dividends, interest, royalty and technical service fees, with tailored definitions for software and digital rights, while introducing Significant Economic Presence and attribution rules plus indirect transfer tests and exemptions.