Tax must be deducted on a payment to a foreign vendor only if the income in that payment is chargeable to tax in India. For software licences, SaaS subscriptions and professional fees, that usually turns on two questions. Under Indian domestic law, is the payment royalty, fees for technical services or business income connected with India? And does the tax treaty with the vendor's country take it out of tax, or tax it at a lower rate? For payments made on or after 1 April 2026, withholding on payments to non-residents is governed by section 393(2) of the Income-tax Act, 2025, which replaces section 195 of the 1961 Act. The underlying analysis is unchanged. Many routine foreign payments end up with no withholding, or withholding at a reduced treaty rate. But that has to be established and documented for each vendor, not assumed.
The rule, under the old and new Acts
Section 195 of the Income-tax Act, 1961 required a person paying a non-resident any sum chargeable to tax in India to deduct tax at the rates in force. From the tax year 2026-27, the Income-tax Act, 2025 applies. The Income Tax Department's published text of section 393 places payments to non-residents in sub-section (2), with "any other sum chargeable under the provisions of this Act" at serial number 17 of its table, at the rates in force. Gross-up, where the payer bears the vendor's tax, is dealt with in section 393(10).
Payments made up to 31 March 2026 remain under the 1961 Act. Payments from 1 April 2026 fall under the 2025 Act. The forms have also been renumbered. The Income Tax Department's form FAQs map Form 15CA to Form 145, Form 15CB to Form 146 and Form 27Q to Form 144.
Step 1: Is the income chargeable in India at all?
Domestic law starts the analysis. A non-resident is taxed in India on income that accrues or arises in India, or is deemed to. For vendor payments, the usual categories are:
- Royalty. Domestic law defines royalty broadly, and it has been extended over the years to include the use of computer software.
- Fees for technical services. Payments for managerial, technical or consultancy services.
- Business income. Taxable in India only where there is a business connection in India, and under a treaty only where the vendor has a permanent establishment in India.
If none of these applies, there is nothing to withhold. Where one may apply, the treaty comes next.
Step 2: What does the treaty change?
Where India has a tax treaty with the vendor's country of residence, the vendor can be taxed under the treaty or domestic law, whichever is more beneficial. Three treaty features recur in vendor payments.
- Royalty definitions are often narrower than domestic law. In Engineering Analysis Centre of Excellence v CIT (Supreme Court, 2 March 2021), the Court held that payments for end-user licences of computer software, and for distribution of software, were not royalty under the treaties considered. There was therefore no obligation to deduct tax on them. The Court distinguished a licence to use a copyrighted product from a transfer of the copyright itself.
- "Make available" clauses. Several treaties tax fees for technical or included services only if the service makes available technical knowledge, skills or know-how that the payer can apply independently. A routine service that leaves nothing behind may not meet that test, and is then business income, taxable only if there is a permanent establishment.
- Reduced rates. Where royalty or fees for technical services are taxable under a treaty, the treaty usually caps the rate. Withholding is then at the treaty rate, not the domestic rate.
Applying this to common payments:
- Off-the-shelf software and end-user licences. Following Engineering Analysis, generally not royalty under the treaty where the vendor's country has a comparable treaty definition, so no withholding, subject to documentation.
- SaaS and cloud subscriptions. Characterisation depends on what is supplied. Access to a standard hosted service is often argued to be business income. Where the arrangement grants rights in software or provides technical services that meet the treaty test, it may be royalty or fees for technical services. Each major subscription deserves its own short analysis on file.
- Professional and consultancy fees. Under many treaties, these are business income or independent personal services, taxable in India only through a permanent establishment or fixed base. Where a "make available" clause applies, routine consultancy often falls outside fees for technical services. Where there is no such clause, the fees for technical services article may tax them at the treaty rate.
Step 3: Documents needed to apply the treaty
A treaty position is only as good as its documents. Collect them before the first payment, and refresh them every year.
- Tax Residency Certificate from the vendor's tax authority, for the relevant period.
- The prescribed form with the details the TRC does not contain. This was Form 10F under the 1961 Act, and is Form 41 under the new rules.
- A declaration of no permanent establishment in India, where business income treatment is claimed.
- The vendor's PAN, or the alternative documents the rules accept from a non-resident without one. Without a PAN, a higher withholding rate can apply, as it did under section 206AA of the 1961 Act. Confirm the corresponding provision and conditions under the 2025 Act.
- The contract or terms of service, which drive the characterisation.
The equalisation levy is no longer the answer
For several years, payments for online advertising and some e-commerce supplies were dealt with through the equalisation levy rather than income tax withholding. That has ended. The 2% levy on e-commerce supplies was withdrawn for transactions from 1 August 2024. The 6% levy on online advertising was withdrawn from 1 April 2025 by the Finance Act, 2025. Payments that used to sit under the levy must now be analysed under the normal steps above. For most advertising and platform payments, that leads to a business-income analysis under the relevant treaty.
Remitting the payment
Before remitting, the payer furnishes the remittance information in the prescribed form: Form 15CA under the 1961 Act, Form 145 under the new rules. Where required, it obtains a chartered accountant's certificate in the prescribed form: Form 15CB, now Form 146. The certificate records the nature of the payment, the treaty position taken and the tax deducted. It should be signed only after the documents above have been reviewed.
Tax deducted is deposited and reported in the quarterly statement for payments to non-residents: Form 27Q, now Form 144. A payer that does not deduct where it should can be treated as an assessee in default. Under the 1961 Act, the expense could also be disallowed in computing its own business income. Check the corresponding provision under the 2025 Act. The cost of getting this wrong therefore falls on the Indian payer, not only on the vendor.
A short checklist for the finance team
- Keep a register of foreign vendors with the nature of each payment, the treaty country, the position taken and the documents held.
- Refresh TRCs and the prescribed forms annually.
- Review new subscriptions and contracts before the first payment, not after.
- Prepare the remittance form, and the CA certificate where needed, for each remittance, and keep copies with the invoice.
- Reconcile foreign payments in the books with the quarterly withholding returns.
Where this fits
Foreign vendor payments often carry a GST consequence as well, as imports of services under reverse charge. For the intermediary-services angle, see GST on export of services after the Finance Act 2026 intermediary change.
Wissen Solutions reviews foreign vendor payments, prepares remittance certificates and files withholding returns through our GST, income tax and TDS return filing services.
Sources (checked 24 October 2026)
- Income Tax Department: Section 393, Income-tax Act, 2025: sub-section (2), Table serial no. 17; sub-section (10)
- Income Tax Department: Form 145 FAQs (formerly Form 15CA)
- Income Tax Department: Form 146 FAQs (formerly Form 15CB)
- Income Tax Department: Form 144 FAQs (formerly Form 27Q)
- Income Tax Department: Form 41 (formerly Form 10F)
- Income Tax Department: Equalisation levy
- Engineering Analysis Centre of Excellence Pvt. Ltd. v Commissioner of Income Tax, Supreme Court of India, 2 March 2021
- Equalisation levy withdrawal dates (commentary); Finance Act, 2025