DTAA & Withholding Tax on Payments to Non-Residents

When an Indian business pays a non-resident — for software, royalties, technical services, interest or professional fees — tax must generally be withheld at source before the money leaves India. The rate is set by the Income-tax Act, but a Double Taxation Avoidance Agreement between India and the recipient’s country will often prescribe a lower one. Getting this wrong is expensive: the deductor, not the recipient, bears the consequence of short deduction.

Why withholding applies at all

Section 195 requires any person paying a non-resident a sum chargeable to tax in India to deduct tax at the time of credit or payment, whichever is earlier. Two points make this stricter than ordinary TDS. There is no threshold below which it does not apply, and the obligation extends to any payer, including individuals and firms.

The prior question is whether the income is chargeable in India at all. That turns on whether it accrues or arises in India or is deemed to under Section 9 — which covers, among other things, royalty and fees for technical services paid by an Indian resident. If the sum is not chargeable, no withholding is required, but that conclusion should be documented rather than assumed.

How a DTAA changes the position

India has comprehensive tax treaties with a large number of countries. Where a treaty applies, the taxpayer may rely on whichever of the treaty or the domestic law is more beneficial. In practice the treaty rate on royalties, technical fees, interest and dividends is frequently lower than the domestic rate, which is why treaty entitlement is worth establishing properly.

A treaty can also remove the charge altogether. Business profits of a non-resident are generally taxable in India only if attributable to a permanent establishment here. So a foreign supplier providing services from abroad, without a PE in India, may have no Indian tax liability on those profits at all — though the analysis of what constitutes a PE, including service and agency PEs, is fact-specific and worth taking advice on.

Documents needed to apply a treaty rate

Treaty benefit is not automatic. Before applying a reduced rate, collect and retain:

• Tax Residency Certificate issued by the tax authority of the recipient’s country for the relevant period. This is mandatory.
• Form 10F, filed electronically on the income tax portal, supplying details not contained in the TRC.
• No Permanent Establishment declaration from the recipient, where the treaty article depends on the absence of a PE.
• PAN of the recipient where available. Absence of PAN can trigger a higher rate under Section 206AA, though relief is available where the prescribed alternative details are furnished.
• Beneficial ownership confirmation, since reduced rates on royalties, interest and dividends typically require the recipient to be the beneficial owner.

Also consider the Multilateral Instrument, which has modified many of India’s treaties, and the principal purpose test it introduces — treaty benefit can be denied where obtaining it was a principal purpose of the arrangement.

Compliance mechanics

• Form 15CA — declaration by the remitter, filed online before remittance.
• Form 15CB — certificate from a Chartered Accountant on the nature of the remittance and the rate applied, required in prescribed cases.
• TAN — the deductor must hold one; withholding cannot be discharged without it.
• Deposit and return — tax deposited by the due date, and the quarterly statement in Form 27Q filed for payments to non-residents.
• Form 16A — certificate issued to the recipient, which they will need to claim credit in their home country.

Where there is genuine doubt about chargeability or rate, the payer or the recipient can apply to the Assessing Officer for a certificate authorising deduction at a lower or nil rate, rather than deducting at the maximum and leaving the recipient to claim a refund.

Consequences of getting it wrong

If tax is not deducted or is short-deducted, the payer is treated as an assessee in default and is liable for the tax itself plus interest, and penalty may follow. Separately, the expenditure can be disallowed in computing the payer’s own business income, which turns a withholding error into a second tax cost on the same transaction. Because the exposure sits with the payer, the commercial contract should address who bears Indian withholding — a gross-up clause is common and should be priced deliberately.

Practical approach

Work through four questions for every non-resident payment. Is the sum chargeable to tax in India under the Act? If yes, what does the Act prescribe? Does a treaty apply, and is the treaty rate lower? Do I hold a valid TRC, Form 10F and, where relevant, a no-PE declaration for the period of payment?

Build the document collection into onboarding rather than chasing it at payment time, and refresh the TRC each year — an expired certificate is the most common reason a treaty rate is disallowed on assessment. Rates vary considerably by country and by income type, so confirm the applicable figure for the specific treaty and payment using the TAXAJ DTAA rate finder rather than working from a general rate.

Frequently asked questions

Is a Tax Residency Certificate compulsory to claim treaty benefit?

Yes. The Act requires a TRC from the government of the recipient’s country of residence, supplemented by Form 10F where the TRC does not carry all prescribed particulars. Without a valid TRC for the relevant period, the domestic rate applies.

What if the non-resident has no PAN?

Section 206AA can require deduction at a higher rate where the recipient has no PAN. Relief is available where the recipient furnishes the prescribed alternative details, including name, address, country of residence, TRC and tax identification number, so collect these as a matter of routine.

Do I need Form 15CB for every foreign remittance?

No. Form 15CB is required in prescribed cases; certain remittances are exempt from the requirement and others need only Part A or Part D of Form 15CA depending on the amount and nature. Check the applicable part for your specific remittance rather than obtaining a certificate reflexively.

Does withholding apply if the foreign company has no presence in India?

It depends on the character of the income, not on physical presence. Royalties and fees for technical services paid by an Indian resident are generally deemed to accrue in India regardless of where the service is performed. Business profits, by contrast, usually require a permanent establishment before India can tax them. For cross-border structuring around this, see our guidance on setting up an Indian presence.