When Indian businesses receive international payments, the question of TDS (Tax Deducted at Source) comes up in two directions: TDS deducted by your foreign client on payments to you, and TDS you must deduct when paying international vendors. Both are frequently misunderstood. This guide covers both sides.
Part 1: TDS Deducted by Foreign Clients on Payments to You
Why Foreign Clients Deduct TDS
Many countries require businesses to withhold a percentage of payments to foreign service providers and remit it to their local tax authority. This is called withholding tax (equivalent of India's TDS).
Common withholding scenarios for Indian businesses:
| Country | Service Type | Withholding Rate (Without DTAA) |
|---|---|---|
| USA | Professional services | 30% (reduced under US-India DTAA) |
| UK | Professional services | 20% (reduced under UK-India DTAA) |
| Germany | Professional services | 15-25% |
| Australia | Professional services | 30% (reduced under Aus-India DTAA) |
| USA | Software services | May qualify as business income (0% withholding) |
How DTAA Reduces or Eliminates Withholding
India has Double Taxation Avoidance Agreements with 90+ countries. Most DTAAs eliminate or significantly reduce withholding on professional service fees.
For US clients paying Indian businesses: Under the India-US DTAA, professional service fees are generally business income — taxable only in India. US withholding should be 0% if you provide:
- Form W-8BEN-E (for companies) or Form W-8BEN (for individuals) to your US client
- These forms certify your Indian tax residency and claim treaty benefits For UK clients: UK clients withhold 20% by default on professional services to Indian vendors. Under India-UK DTAA, this may be reduced. Provide Form 10F and Tax Residency Certificate (TRC) from Indian IT department.
What to Do When Foreign Client Withholds Tax
- Ask your client for the TDS/withholding certificate (Form 1042-S from US clients; equivalent from other countries)
- Declare the gross income (before withholding) in your Indian ITR
- Claim the foreign tax paid as a credit in your Indian ITR under Section 90/91
- Net result: you don't pay tax twice. Foreign withholding offsets your Indian income tax liability
Part 2: TDS You Must Deduct on Payments to International Vendors
When Indian Businesses Pay Foreign Vendors
If you pay fees to international software companies, freelancers, or service providers, you may need to deduct TDS before remitting.
Key provisions:
Section 194LB/194LC/194LD: TDS on interest payments to non-residents.
Section 195: TDS on any payment to a non-resident that is chargeable to Indian income tax.
Practical examples:
- Paying a US freelancer $1,000 for design work: Section 195 may apply
- Paying a SaaS subscription to a US company: Section 195 may apply at treaty rate
- Paying Canva/Figma/similar international SaaS: technically Section 195, though enforcement is limited Rate: Withholding under Section 195 at treaty rate (often 10-15% for professional services) or 20% without treaty.
Form 15CA/15CB: For remittances above certain thresholds, Form 15CA (self-declaration) and Form 15CB (CA certificate) may be required before your bank processes the wire.
Form 15CB Threshold
Form 15CB (CA certificate) is required when:
- Single remittance exceeds ₹5 lakh in a financial year AND
- The payment is chargeable to tax in India For routine SaaS subscriptions and small vendor payments: often below this threshold. Consult CA for your specific payment profile.
The Practical Bottom Line for Indian Service Exporters
Receiving from foreign clients:
-
Provide W-8BEN-E (US clients) or Form 10F + TRC (UK/EU clients) to claim DTAA treaty benefits
-
Request withholding certificates if tax is withheld
-
Declare gross income in ITR and claim foreign tax credit Paying international vendors:
-
Consult CA on Section 195 applicability before large international vendor payments
-
Form 15CA/15CB for payments above ₹5 lakh per year to same vendor
FAQ
Do US clients need to withhold tax on payments to Indian businesses? Under India-US DTAA, professional service income is generally taxable only in India. Provide Form W-8BEN-E to your US client. If they withhold despite treaty: request Form 1042-S and claim foreign tax credit in Indian ITR.
What is Form W-8BEN-E and when do Indian businesses need to provide it? W-8BEN-E is a US IRS form certifying your non-US tax status and treaty eligibility. Provide to any US client who asks about withholding on payments to you. Reduces or eliminates US withholding.
Does Indian GST apply to international payments I receive? No. International service revenue is zero-rated under LUT. GST (18% IGST) does not apply to export of services.
Does Playto Pay handle TDS on international payments? Playto Pay provides FIRA documentation for each transaction. TDS on international receipts is a matter between you, your foreign client, and your Indian CA. Playto Pay's role is payment processing and FIRA generation.