Section 195: TDS on Foreign Payments (Royalties, FTS, Dividends)

Section 195 of the Income Tax Act governs Tax Deducted at Source (TDS) on payments to non-residents. For Indian businesses relying on foreign software (SaaS), cloud infrastructure, or international consultants, understanding Section 195 is critical to avoiding heavy penalties and disallowance of expenses.

The Scope of Section 195

Any person responsible for paying any interest or any other sum chargeable to tax under the Income Tax Act to a non-resident must deduct tax at source at the “rates in force”.

Unlike domestic TDS (which has specific thresholds like ₹30,000 for contractors), Section 195 has no threshold limit. TDS applies from the very first rupee.

Common Foreign Payments Subject to TDS

1. Royalties: Payments for software licenses, SaaS subscriptions (e.g., AWS, GitHub, foreign CRM tools), patents, and copyrights.
2. Fees for Technical Services (FTS): Payments for managerial, technical, or consultancy services provided by foreign experts.
3. Interest: Interest paid on foreign currency loans.
4. Dividends: Dividends paid to foreign parent companies or investors.

The Role of DTAA (Double Taxation Avoidance Agreement)

The Indian Income Tax Act prescribes standard rates for foreign payments (often 20% for royalties/FTS). However, Section 90 allows taxpayers to apply the provisions of a DTAA if they are more beneficial.

For example, the India-US DTAA caps the tax rate on Royalties and FTS at 10%. If an Indian startup pays an American software company for a SaaS product, they can deduct TDS at 10% instead of 20%, provided the American company furnishes:

1. Tax Residency Certificate (TRC): Issued by the foreign tax authority (e.g., the IRS in the US) proving they are a resident of that country.
2. Form 10F: A self-declaration covering any details not present in the TRC.
3. No PE Declaration: A declaration stating the foreign company does not have a Permanent Establishment in India.

Note: If the foreign entity does not possess an Indian PAN, Section 206AA mandates a higher TDS rate (usually 20%). However, under Rule 37BC, if the payee provides their TRC, foreign tax ID, name, email, and address, the higher rate under 206AA does not apply.

Form 15CA and Form 15CB

Before your bank will allow an international wire transfer (Swift payment), you must typically submit Forms 15CA and 15CB.

• Form 15CB: A certificate issued by an Indian Chartered Accountant. The CA reviews the invoice, the DTAA, the TRC, and certifies the correct rate of TDS to be deducted.
• Form 15CA: An online declaration filed by the remitter on the Income Tax portal, based on the CA’s 15CB certificate.

Certain low-value transactions (under ₹5 lakh aggregate per FY) or specific exempt import payments may only require Form 15CA Part A (no CA certificate required).

Filing Form 27Q

Once the TDS is deducted and paid to the Indian government (by the 7th of the following month), the deductor must file Form 27Q on a quarterly basis.

Form 27Q is the specific quarterly TDS return for non-resident payments. It captures the deductee’s details, the DTAA code applied, the remittance details, and the TRC status.

Failure to file Form 27Q correctly leads to penalties and prevents the foreign payee from claiming the foreign tax credit in their home country.

[!IMPORTANT] Expense Disallowance (Section 40(a)(i)) If you fail to deduct TDS under Section 195 on a foreign payment, 100% of that expense will be disallowed when calculating your Indian corporate income tax. This essentially taxes you on money you have already spent.

CA-Led Filing for Foreign Payments

Cross-border TDS is complex. Applying the wrong DTAA article or missing a Form 15CB can freeze vendor payments and invite tax scrutiny.

Batchwise coordinates Form 27Q return filing and 15CA/CB certification through vetted partner CA firms who specialize in cross-border transactions. See our TDS Return Filing Service to get started.