Summary: Foreign companies providing services to Indian customers without establishing an Indian entity must evaluate their Indian income-tax exposure, withholding obligations and GST treatment before finalising contracts. The tax outcome depends on the nature of the services, their place of performance, the existence of a business connection or permanent establishment (PE), and the provisions of an applicable Double Taxation Avoidance Agreement (DTAA). Under the Income-tax Act, 1961, fees for technical services may be deemed to accrue in India even when the services are performed abroad, subject to statutory exceptions and treaty relief. Business profits may receive treaty protection where the foreign enterprise has no taxable PE in India. Indian customers must separately determine whether withholding tax applies under Section 393(2) of the Income-tax Act, 2025, corresponding to Section 195 of the earlier Act. The applicable compliance framework also includes tax residency certificates, Form 10F, lower or nil withholding certificates, and Forms 145 and 146 for specified foreign remittances. Temporary deployment of employees to India may create additional PE exposure. For GST, the place-of-supply rules determine whether the services qualify as imports, with registered Indian recipients generally discharging IGST under reverse charge where applicable. Special registration obligations may arise for overseas suppliers of Online Information and Database Access or Retrieval services to unregistered Indian recipients. The article also examines FEMA documentation, invoicing requirements, withholding gross-up clauses and practical tax outcomes for common cross-border service arrangements.
1. Is the income taxable in India?
Under section 5(2) of the 1961 Act, a non-resident is taxed on income that accrues or arises in India or is deemed to do so. Services performed outside India for an Indian customer do not ordinarily give rise to Indian-source business income, unless a business connection or PE exists. Two exceptions need attention:
- Payments characterised as fees for technical services under section 9(1)(vii) are deemed to arise in India where the payer is a resident, regardless of where the services are rendered, subject to the exclusion for services utilised for a business outside India.
- Where the foreign company has a PE (fixed place, dependent agent, service PE) in India, the profits attributable to the PE are taxed in India.
2. Business profits or FTS
The distinction is practical. A payment for consulting, design, testing or management services is FTS if it is managerial, technical or consultancy. Under the domestic law, FTS is taxed at 20% on a gross basis (section 115A, 1961 Act). Under many treaties, FTS is taxable only if the services make available technical knowledge or are ancillary to an enjoyment of a right, and otherwise falls within business profits taxable only if there is a PE. The service contract should describe what is delivered and whether knowledge is transferred.
3. Withholding by the Indian customer
The Indian customer withholds under section 393(2) of the 2025 Act (earlier section 195) unless it holds a lower deduction certificate, or the income is clearly not chargeable. Published rate tables (July 2026) list FTS at 20% for the general category. Under the 2025 Act, Forms 145 and 146 replace Forms 15CA and 15CB. The foreign supplier should expect the customer to ask for a TRC, Form 10F, no-PE declaration and PAN. Contracts that require the customer to pay without deduction invite gross-up under section 195A of the 1961 Act, increasing the customer’s cost.
4. PE risk from delivery
Sending staff to India to deliver the services can create a service PE under many treaties. It is common for projects to cross the day-count threshold when visits by multiple people are aggregated. A project plan that tracks days by person and by contract, and holds an agreed limit, is more reliable than an after-the-event calculation.
5. GST
Import of services is taxed under IGST. Where the Indian customer is a registered business, it pays GST under reverse charge (section 5(3) IGST Act) and can claim input tax credit. The foreign supplier does not ordinarily need to register, except in the cases of OIDAR supplies to unregistered Indian recipients or where supplies are made through a place of business in India. The place of supply rules determine whether the supply is an import or an export.
6. FEMA and invoicing
Inbound payments from the Indian customer are made through an authorised dealer bank with the documents under the 2025 Act forms. Invoices should state the services, the period, the basis of fees, the foreign supplier’s address and its tax identification number.
7. Summary matrix
| Scenario | Indian income tax | Withholding | GST |
|---|---|---|---|
| Services performed abroad, no knowledge transfer, treaty applies, no PE | Generally none (business profits) | Possibly nil under a certificate | RCM by customer |
| Services performed abroad, technical services, no treaty relief | FTS at 20% gross | Yes | RCM by customer |
| Services performed through Indian PE | Profits attributable to PE at 35% plus surcharge and cess | Yes, or file return | Depends on structure |
| Online services to Indian consumers | Depends | Not applicable | OIDAR registration |
Practical takeaway: map where the services are performed, who performs them, what the customer receives and which treaty applies, before you quote a price. Tax that the customer withholds is a cost to the relationship unless it is allocated in the contract.
Sudheer Nagavarapu, M.com, F.C.S., L.L.B is a Partner at A2 Consultants, Hyderabad.
