Withholding Tax on Cross Border Payments and Treaty Relief
When an Indian company pays a foreign supplier, parent or lender, the question is not what the invoice says. It is whether the sum is chargeable to Indian tax, at what rate, what the treaty does to that rate, and whether the paperwork supporting the answer existed before the money left. If the answer is wrong, the Indian payer carries it.
- Withholding follows chargeability, not the act of remitting
- Form 10F became Form 41, and Permanent Account Number is now expressly optional on it
- Forms 15CA and 15CB became Forms 145 and 146
- No equalisation levy is chargeable in India today
Four numbers that decide most remittance questions
Is the sum chargeable to Indian tax at all
Two Acts are live at once. The Income-tax Act 1961 governs FY 2025-26, the year being filed now. The Income-tax Act 2025 governs tax year 2026-27 onward. Section, rule and form numbers differ between them, so every citation below names the year and the Act.
The obligation to withhold arises on any sum chargeable under the Act paid to a non resident. Chargeability comes first. It is not triggered by the fact of a foreign remittance, and it is not triggered by the payment being large.
The Supreme Court settled this in GE India Technology Centre in 2010: the remittance has to be of a receipt, the whole or part of which is liable to tax in India, and the phrase 'sum chargeable under the provisions of the Act' does real work in the section. The Court also rejected the argument that a payer must always apply to the officer first. Where the payer is fairly certain, it may make its own determination. The application route exists for composite payments where the taxable proportion is genuinely uncertain.
That decision was on the 1961 Act, and it survives the renumbering intact because the 2025 Act uses the same formula: the residual entry in the withholding table covers any other sum chargeable under the provisions of the Act.
Why this matters commercially
A payer who withholds on everything to be safe is not being safe. Over withholding on a non chargeable payment is a real cost to a supplier who will pass it back to you in the price, or refuse to accept it and put you in breach of contract. Under withholding on a chargeable one leaves the Indian payer liable for the tax, interest, and a disallowance of the expenditure. The answer has to be decided, not defaulted.
Where the provisions live, in both Acts
| What | FY 2025-26, Income-tax Act 1961 | Tax year 2026-27 onward, Income-tax Act 2025 |
|---|---|---|
| Withholding on sums paid to a non resident | Section 195(1) | Section 393(2), the table, serial number 17, at rates in force |
| Lower or nil deduction certificate | Three separate routes: sections 195(2), 195(3) and 197 | Consolidated into a single section 395 |
| Reporting the remittance | Section 195(6) | Section 397(3)(d) |
| Treaty relief | Section 90 and section 90A | Section 159 |
| Relief where there is no treaty | Section 91 | Section 160 |
| Rate on dividend, royalty and technical services for a foreign company | Section 115A | Section 207 |
| Higher rate where the payee has no Permanent Account Number | Section 206AA | Section 397(2)(b)(i) |
| Higher rate for non filers | Section 206AB, omitted with effect from 1 April 2025 | No successor provision |
Two mapping errors are circulating widely and both send a reader to the wrong provision: section 195 is not section 397, which is the reporting provision, and section 206AA is not section 394, which is tax collection at source.
The consolidation of the three certificate routes into one section is a genuine simplification. Under the old law, whether the payer or the payee applied, and under which sub-section, was a recurring source of confusion and of rejected applications. Under the 2025 Act there is one certificate provision.
Forms 15CA and 15CB are now Forms 145 and 146
A widely syndicated source describes Forms 145 and 146 as the way a non resident applies for a lower deduction rate. That is wrong. Lower deduction is applied for under section 395. These forms are reporting.
Every person paying a sum to a non resident has to furnish information about the payment, whether or not the sum is chargeable to tax. That last clause is the reason Part D of the form exists: you report a non chargeable remittance as a non chargeable remittance, rather than not reporting it at all.
The structure has four parts and it did not change with the renumbering. What changed is the form numbers, and the names are unrecognisable from the old ones.
| Part | When it applies | Form, FY 2025-26 | Form, tax year 2026-27 onward |
|---|---|---|---|
| A | Chargeable remittance where the aggregate in the year does not exceed Rs 5 lakh | Form 15CA Part A | Form 145 Part A |
| B | Above Rs 5 lakh, where an officer has issued a certificate or order | Form 15CA Part B | Form 145 Part B, citing a certificate under section 395 |
| C | Above Rs 5 lakh, supported by an accountant's certificate | Form 15CA Part C with Form 15CB | Form 145 Part C with Form 146 |
| D | The sum is not chargeable to tax | Form 15CA Part D | Form 145 Part D |
Form 145 is the remitter's declaration. Form 146 is the accountant's certificate. They are different instruments with different signatories, and the accountant does not sign the declaration.
The exemptions carried over, and one common shorthand gets them wrong
No information has to be furnished for a remittance that is not chargeable to tax where one of three things is true: it is made by an individual and does not need prior Reserve Bank approval under the exchange control rules for current account transactions; it is made by a unit in an International Financial Services Centre; or it falls in the specified list of thirty three categories, each identified by its Reserve Bank purpose code, covering imports, travel, education, family maintenance and similar. That list was Rule 37BB(3) and is now Rule 220(3)(c) of the Income-tax Rules 2026, in substantially the same form. Departmental guidance summarises the first category as payments by an individual under the Liberalised Remittance Scheme and the third as payments under the relevant purpose code. Both are shorthand. The test is the one in the rule, and the purpose codes that count are the thirty three in the table, not the Reserve Bank's whole catalogue.
The residence certificate, and the form that replaced Form 10F
A non resident is taxed at the rate under the Act or the rate under the applicable treaty, whichever is more beneficial. Because the Act rate on royalty and technical services is now 20 per cent and treaty rates are commonly 10 to 15 per cent, the treaty claim is usually worth making, which makes the paperwork behind it the operative constraint rather than an afterthought.
Treaty relief is conditional on the non resident obtaining a certificate of residence from the government of its own country, and on providing the other prescribed information. Both Acts say so. What changed on 1 April 2026 is how the prescribed information is furnished.
Up to 31 March 2026
Tax residency certificate from the foreign government, plus Form 10F. Electronic filing of Form 10F was mandated in 2022, which created a problem for non residents with no Permanent Account Number because the portal required one to register. That was handled by a manual filing relaxation, extended more than once, and then by a portal change that allowed registration without a number. The relaxation and the portal change were administrative, not statutory.
From 1 April 2026
Tax residency certificate, uploaded with Form 41 under Rule 75 of the Income-tax Rules 2026. Electronic filing only. Permanent Account Number is expressly optional on the form, and there is a registration category for non residents without one. The certificate has to be valid for the relevant year. This is now the statutory position rather than a concession.
The mirror image form, which people confuse with it
Form 41 is what a non resident files to claim a treaty benefit in India. Form 42 is what an Indian resident files to obtain an Indian residence certificate for use abroad, replacing Form 10FA. They point in opposite directions and it is worth being explicit about which one you need.
Practically every published article still refers to Form 10F and treats the no Permanent Account Number position as an unresolved workaround. That description was accurate for years and has not been accurate since April 2026.
A residence certificate is necessary, and since January 2026 it is plainly not enough
In Authority for Advance Rulings v Tiger Global International II Holdings, 2026 INSC 60, decided on 15 January 2026, the Supreme Court held that a tax residency certificate is a condition of eligibility for treaty relief but not conclusive evidence of residence or of entitlement, and that it does not bind the department or a court without an independent look at the facts. Since sections 90(2A), 90(4) and 90(5) and the general anti-avoidance rules were enacted, holding a certificate does not stop an enquiry into where the entity is really managed and controlled, whether it has commercial substance, or whether it is part of an arrangement to avoid tax. The Court held that the earlier CBDT circulars could not override that later statutory scheme. It also read the grandfathering of investments made before 1 April 2017 narrowly: the investment is protected, but an arrangement that produces a tax benefit after that date can still be examined. On the facts it denied treaty relief.
The practical consequence for a payer is that collecting the certificate and Form 41 is what makes a treaty claim possible, not what makes it safe. Where the payee is an intermediate holding or conduit entity, the claim rests on substance, and the payer applying the treaty rate is taking a view on that substance whether or not it realises it.
The rate doubled, and most published guidance has not caught up
The rate of Indian tax on royalty and on fees for technical services paid to a non resident or foreign company is 20 per cent, before surcharge and cess. It was 10 per cent until the Finance Act 2023 doubled it. The commencement is commonly cited as 1 April 2023, and both Acts now carry 20 per cent, so the rate itself is not in doubt.
This is the most common single error in circulation on cross border payments, and it is not a harmless one. At 10 per cent the Act rate and the treaty rate were often close enough that a payer could afford to be casual about the residence certificate. At 20 per cent the gap is worth several times the cost of getting the paperwork right, and the paperwork, with the substance behind it, is what stands between the two rates.
Whether a payment is royalty or fees for technical services at all is a separate question and often the harder one. The Supreme Court held in Engineering Analysis Centre of Excellence in 2021 that amounts paid by Indian end users and distributors to non resident software suppliers for the resale or use of shrink wrapped software are not royalty, and give rise to no income taxable in India, so no withholding obligation arises. The Court relied on the distinction between a copyright and a copyrighted article, and on the treaty definition prevailing where it is more beneficial.
The make available test
Indian law does not require the payer's skill to be passed on before a fee counts as a fee for technical services; section 9(7)(b) of the 2025 Act has no such condition. Some Indian treaties do. Under those treaties, for example with the United States, the United Kingdom, Singapore, Canada, the Netherlands and Portugal, technical or consultancy services generally fall inside the definition only where they make technical knowledge, experience, skill, know how or processes available to the recipient, so that it can apply them on its own afterwards. Using a provider's expertise is not the same as acquiring it, and the Delhi High Court has applied that distinction under the United Kingdom treaty in 2024 and the United States treaty in 2025. The wording differs between treaties, and some carry separate limbs, for services ancillary to a royalty or for technical plans and designs, that do not depend on the test at all. We read the actual treaty, protocol and related instruments for the actual counterparty rather than applying a general rule, because on this point there is no general rule.
The higher rate, and the relief from it
A payee entitled to receive an amount on which tax is deductible has to furnish a Permanent Account Number. Without one, tax is deducted at the higher of the rate in the relevant provision, the rates in force, or 20 per cent. For a foreign supplier with no Indian presence and no reason to have an Indian tax number, that can wipe out the treaty rate entirely.
There is relief, and it is conditional rather than automatic. Where the payment is interest, royalty, fees for technical services, dividend or consideration on transfer of a capital asset, the higher rate does not apply if the non resident furnishes its name, email, contact number and address in its country of residence, a certificate of residency from that government if available, and its taxpayer identification number there or an equivalent unique identification number.
That relief was Rule 37BC under the old Rules and is Rule 217 of the Income-tax Rules 2026. It is worth collecting these details as a matter of course in the onboarding of any foreign vendor, because obtaining them after an invoice is due is slow and the withholding decision cannot wait.
The non filer rule has gone
Section 206AB, which imposed a higher rate on payees who had not filed returns, was omitted by section 71 of the Finance Act 2025 with effect from 1 April 2025, and there is no equivalent in the Income-tax Act 2025. It applied up to 31 March 2025, which matters for any period still open. A good deal of published content dates the omission to the Finance (No. 2) Act 2024 and 1 October 2024; that is wrong, and the department's own text of the Act as amended by that Finance Act still carried the section. Content still telling deductors to run a compliance check before every payment is describing a provision that no longer exists. The separate higher rate for a payee with no Permanent Account Number, above, is unaffected. Note also that even when section 206AB was in force it never applied to a non resident without a permanent establishment in India, which a good deal of contemporary guidance got wrong.
There is no equalisation levy in India today
The equalisation levy was never part of the Income-tax Act. It lived in the Finance Act 2016, which is why the recodification did not touch it and why there is no equalisation levy provision anywhere in the Income-tax Act 2025.
Both limbs have been withdrawn. The 2 per cent levy on consideration for e-commerce supply or services ended in respect of consideration received on or after 1 August 2024. The 6 per cent levy on online advertising ended in respect of consideration received on or after 1 April 2025. The department's own page records that the provisions are not applicable with effect from 1 April 2025.
This has the worst published record of anything in this guide. A large volume of Indian advisory content, including material updated this year, still describes a live 2 per cent levy. Treat any source describing a current equalisation levy as stale, whatever its date.
A levy that has ended is not a file that is closed
The sunset provisions stop the charge for later transactions. They did not repeal the machinery in Chapter VIII of the Finance Act 2016, so it still runs for periods before the cut off dates: the annual statement for a year in which the levy applied, belated and revised statements within their time limits, processing, rectification, interest, penalty and recovery, and appeals to the Commissioner (Appeals) and on to the Tribunal. If you paid, should have paid, or deducted the levy for a period before 1 August 2024 or 1 April 2025, treat that period as open until its limitation dates have passed.
Why a protocol does not lower your rate by itself
Several Indian treaties contain a most favoured nation clause in the protocol, under which a lower rate or narrower scope agreed by India with a third country is supposed to flow through. For years taxpayers claimed the benefit directly, and the Delhi High Court supported them.
The Supreme Court in Nestle in October 2023 held otherwise. A treaty or protocol does not become enforceable in Indian courts merely because India entered into it; a separate notification is required before the provisions confer rights. It also held that membership of the Organisation for Economic Co-operation and Development is tested at the date the third country concluded its treaty with India, not at the later date of the claim. The Delhi High Court decisions in the French, Dutch and Swiss cases were overturned.
The consequence reached beyond India. Switzerland suspended its own unilateral application of the most favoured nation clause in the protocol to the India Switzerland treaty with effect from 1 January 2025, expressly on the basis of the Nestle decision. The dividend rate reverts to 10 per cent for dividends due on or after that date, with the 5 per cent rate continuing to govern income accruing from 5 July 2018 to 31 December 2024. Indian coverage tended to report this as Switzerland withdrawing most favoured nation status, which overstates it, and tended to omit the grandfathering, which is the part that matters for open years.
The 2025 Act carries forward the same 'by notification' wording that Nestle construed, so the reasoning transposes intact. We found no instrument after December 2024 changing the position.
Questions we get about remittances
Can we just deduct 20 per cent on everything and be safe?
No, for two reasons. Over deduction on a non chargeable payment is a real cost that usually comes back to you commercially, and it is not a defence to a later finding that something else was under deducted. The decision has to be made payment by payment.
Our supplier will not give us a tax residency certificate. What now?
Then the treaty rate is not available and the Act rate applies, with the higher no Permanent Account Number rate on top unless the Rule 217 details are furnished. This is worth raising at contract stage, because a gross up clause turns the supplier's reluctance into your cost.
Is a certificate from last year good enough?
No. It has to be valid for the year in which the income arises, and from 1 April 2026 it is uploaded with the Form 41 filing for that year.
We pay a foreign parent for software licences. Is that royalty?
Often not, following the Supreme Court decision in Engineering Analysis. Payments for the resale or use of shrink wrapped software were held not to be royalty and not taxable in India. Whether your arrangement falls inside that holding depends on what rights the licence actually grants, which means reading the contract rather than the invoice.
Do we need Form 146 for every payment?
No. Below the Rs 5 lakh annual aggregate, Part A of the declaration is enough for a chargeable remittance. Above it you need either an accountant's certificate or an officer's order. A non chargeable remittance goes in Part D whatever its size.
Is there goods and services tax on this as well?
Frequently yes, under reverse charge on imported services, and it is a separate tax with separate rules. It is covered on our Indirect Taxation and GST pages. The two are decided independently: a payment can be outside income tax and inside goods and services tax, and the reverse.
Where to go next
Where this connects
The amount you pay a related party is set by your transfer pricing policy, covered on transfer pricing compliance. Whether the foreign recipient has a taxable presence in India changes the analysis completely, and that is permanent establishment. Credit for Indian tax withheld, claimed in the recipient's own country, and credit for foreign tax claimed in India, are on structuring and repatriation.
Where to go next
International Taxation
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Transfer Pricing Compliance and Documentation
What you have to file and keep when you deal with a related party abroad: the accountant's report that has no threshold at all, the Local File, the Master File that catches far more Indian subsidiaries than people expect, country by country reporting, and the safe harbour that was rewritten this year.
Permanent Establishment and Taxable Presence in India
When a foreign enterprise becomes taxable in India without ever setting up a company: business connection, significant economic presence, the three kinds of permanent establishment, what the Multilateral Instrument did to your treaty, and how much profit India can attribute once a presence is found.
Cross Border Structuring, Repatriation and Foreign Tax Credit
The outbound side: putting money into a foreign subsidiary under the 2022 overseas investment rules, claiming credit for tax paid abroad, getting profit back to India or out to a foreign parent, and the three rules that constrain how you structure it.
International Tax Disputes and How They Are Resolved
What happens when the department disagrees: the transfer pricing assessment cycle, the Dispute Resolution Panel and its thirty day window, the appeal ladder, mutual agreement procedure between two governments, advance pricing agreements as a way of avoiding the argument entirely, and where the global minimum tax stands for an Indian group.
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Send us the payment, the contract and the counterparty's country. We will tell you whether it is chargeable, at what rate, and what has to exist before you remit.
Position as at 19 September 2026. Reviewed every six months.
This page is general information, not professional advice. Cross-border tax in India is in the middle of the largest transition it has had in sixty years. The Income-tax Act 2025 replaced the Income-tax Act 1961 on 1 April 2026 and renumbered every section; the Income-tax Rules 2026 replaced the 1962 Rules on the same day and renumbered every rule and every form. The 1961 Act still governs the return being filed for FY 2025-26. That means almost every figure and citation has two correct answers depending on the year you are asking about, and a great deal of published material, including material updated this year, gives only one of them. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.