Does every payment to a foreign company attract withholding tax?
Withholding applies only to sums chargeable to tax in India. The answer turns on the nature of the payment and the tax treaty.
- Published
- Reading time
- 6 min
- Level
- Advanced
01 The question
Your company pays a US vendor for a software subscription. Do you always need to deduct tax before remitting the money?
02 Short answer
No. Section 195 requires tax to be withheld only where the payment is chargeable to tax in India. Whether it is depends on characterisation — business income, royalty or fees for technical services — read together with the applicable tax treaty and whether the vendor has a permanent establishment in India.
03 The rule
Section 195 of the Income-tax Act 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.
A non-resident can choose the more beneficial of the domestic law and the relevant Double Taxation Avoidance Agreement (DTAA), subject to obtaining a Tax Residency Certificate and furnishing Form 10F. Remittances are generally reported through Form 15CA, with a chartered accountant’s certificate in Form 15CB in specified cases.
04 Simple example
Scenario
Sahyadri Analytics pays a Singapore company for an off-the-shelf software licence. Separately, it pays a UK firm to design a bespoke pricing model, delivered with a technical handover.
For the off-the-shelf licence, a key question is whether the payment is a royalty under the treaty or simply the purchase of a copyrighted product. If it is the latter and the vendor has no permanent establishment in India, there may be no Indian tax to withhold.
For the bespoke model, the analysis is different. The payment may qualify as fees for technical services. Under the India–UK treaty, the “make available” test is relevant.
05 Why it matters
Failing to withhold where required can make the payer liable for the tax, interest and — under Section 40(a)(i) — disallowance of the expense.
Over-withholding creates friction with vendors, who may insist on grossed-up pricing.
06 Practical takeaway
- 01Characterise each foreign payment before remittance and document the reasoning.
- 02Collect TRC and Form 10F from vendors claiming treaty benefits.
- 03Consider GST under reverse charge on imported services separately — it is a different tax.
07 Source / reference
- Income-tax Act, 1961 — Sections 9, 90 and 195
- Income-tax Rules, 1962 — Rule 37BB (Forms 15CA/15CB)
- Relevant DTAA — Royalty, FTS and PE articles
References are to the provisions as generally understood at the time of writing. Provisions may since have been amended, renumbered (including under the Income-tax Act, 2025) or interpreted differently.
8. Educational disclaimer
Keep reading
Section 43B(h): Why does delayed payment to an MSME matter?
Your company books an expense for a micro supplier in March but pays in May. Can you still deduct it in the year you booked it?
Late payments to micro and small enterprises can push your tax deduction into a later year — even though the expense is genuine.
You gave a business contact a free trip. Could there be a tax consequence?
Your company sponsors a dealer’s family holiday as a sales incentive. Does anyone need to deduct tax?
Benefits and perquisites given in the course of business can trigger tax deduction at source — even when no cash changes hands.
Why can a GST invoice be valid but ITC still be denied?
You hold a proper tax invoice, you paid the supplier in full, and the goods are in your warehouse. Why might your input tax credit still be challenged?
A valid invoice is only one of several conditions for claiming ITC. Credit also depends on what your supplier reports and pays.