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Taxation on Foreign Payments in India

CA Pulkit Sharma


Government has a system to collect tax in advance; In India we call it Tax Deducted at Source (TDS). Tax is deducted at source not only for payments made within country but also to payments made to any foreign individual or company.

Section 9, 90, 91 and 92 deals with taxation of incomes generates by foreign person in India. Section 195 specifies the rates of tax that should be deducted on any foreign payments.

Here is the description of sections that deals with agreements made between Indian companies and foreign payee.




Agreement with foreign countries or specified territories


Countries with which no agreement exists.


Computation of income from international transaction having regard to arm's length price.


The sections of Income Tax Act, 1961 which talks about Tax Deduction and their description is presented below.




Rates of Tax Deduction


Rates of tax deduction in case payee does not have PAN


Why Tax Deduction Provisions?

In India tax administration cost are higher compared to other nations. Large population is still financially illiterate and collecting tax at the year end becomes difficult. Government of India introduced TDS provisions to enable advance collection of taxes and also to reduce the tax avoidance.

Through TDS provisions the responsibilities to deduct taxes is fixed on tax payers, tax payers have to deduct tax from the payments they make or forgo the tax exemption on expenses.

If you are a foreign person and enter into an agreement with an Indian Company, on which all incomes tax will be deducted?

On below specified incomes earned in India, tax will be deducted at specifies rates

 Taxation on Foreign Payments in India

Tax is deductible only on intangible services or products sold and not on physical product. Exporting your products to India will not make you liable for tax.

Benefits available to foreign payee.

If government of India enters into any agreement regarding double tax avoidance with the country of your residence, then tax will be deducted at the rates specified in The Income Tax Act, 1961 or rates specified in agreement; whichever is beneficial.

These agreements are known as Double Taxation Avoidance Agreements (DTAA). India has entered with almost all countries of the world to avoid double taxation.

However there are some formalities that you have to fulfill along with documents to avail the benefits of DTAA.

To avail the benefits of DTAA, payee has to provide below documents to payers:

  1. Tax Residency Certificate
  2. Form 10F

If I provide TRC and also form 10F, how tax payer will deduct?

The tax rates will be calculated according to provisions of income tax act, section 90-92 talks about the taxation incase of DTAA.

  1. Tax rate will be calculated according to DTAA.
  2. Tax rates will be calculated as per section 195 of Income Tax Act, 1961.

Of the above two rates, lower rates will be applied. For example, suppose you belong to USA and you provided any consultancy services to an Indian company. Your tax deduction rates will be calculated as follow:

  1. Tax rates as per DTAA – 15%
  2. Tax rates as per section 195 Income Tax Act, 1961 – 25.75

Tax will be deducted at the rate 15%.

However we have to consider section 206AA also before applying the above rates. Section 206AA requires that if payee does not have Permanent Account Number (PAN), than tax should be deducted at the highest of:

(i)  At the rate specified in the relevant provision of this Act; or

(ii)  At the rate or rates in force; or

(iii)  At the rate of twenty per cent.

If you do not have Indian Tax Identification Number (TIN), then tax will be deducted at the rate of 20% after applying DTAA provisions.


What is the highest possible rate at which tax may be deducted by payer?


Highest possible rate is 40%. However tax deduction rates are applied after categorizing the business activity. If your income becomes taxable in India and does not fit into any category specified in section 195 (see table above), then tax will be deducted at 40%.

What you should consider before entering into any service agreement with any Indian company?

If we analyze the above mentioned provisions, tax rates can go up to 40%. Before finalizing any deal you should confirm the tax rates and update your cost statements accordingly.

Being a chartered accountant, I regularly advice clients regarding tax provisions. The main issue payer and payee both have to face is tax burden. Unplanned quotation and service agreements may ruin whole project due to impact of tax costs.

If the tax provisions in your country provide the benefits regarding tax deducted in India, you should request a tax deduction certificate from payer to avail the benefits.

For example, India tax laws provides a partial exemption incase tax was deducted outside country on the payments received.

CA Pulkit Sharma


Please note that article is written after considering the general provisions and may not be applicable for your specific decisions. consult advisers before any decision.