India-US DTAA, withholding rates & mechanics.

The India-US Double Taxation Avoidance Agreement (signed 1989, in force 1990, protocols 1991 and 1999) sets maximum withholding tax rates that override higher domestic rates. Current treaty-capped rates:

• Dividends (Article 10): 15% (default); 25% applies in older cases but 15% is the general cap. For dividends from a US corporation to a 10%+ Indian corporate shareholder, 15% is the floor.
• Interest (Article 11): 10% for financial institutions; 15% for other interest.
• Royalties and Fees for Included Services (Article 12): 10% for industrial equipment royalties; 15% for other royalties and most Fees for Included Services (FIS). Note India and US use different terminology — India calls it FTS (Fees for Technical Services), the treaty calls it FIS.
• Business profits (Article 7): taxable only in the residence country unless there is a Permanent Establishment in the source country. If US customer pays Indian company for services with no US PE, no US withholding at all.
• Capital gains on shares (Article 13): taxable in the country of residence of the seller, with specific carve-outs.

Characterisation determines rate. The same money flow can be royalty (Article 12, 15% cap) or business profits (Article 7, no US withholding if no US PE). Which one applies depends on the facts and the contract.

Common misclassification: SaaS subscription payments from US customer to Indian company. If the Indian company provides pure SaaS (customer uses the service, no transfer of software or IP), it is business profits under Article 7 — no US withholding. If the contract transfers software source code, that is a royalty under Article 12 — 15% US withholding applies.

Another common one: cloud hosting fees from US customer to Indian company. US position has swung. Current conservative read: business profits (Article 7) if the Indian company has no US PE. Aggressive IRS positions have argued royalty treatment on specific facts.

To get the US payer to withhold at the treaty rate (instead of the default 30% US domestic rate on most cross-border payments), the Indian recipient must give the US payer:

1. Form W-8BEN-E (for entities; W-8BEN for individuals). This is a US IRS form the Indian recipient signs certifying their foreign status and treaty eligibility. Must be renewed every 3 years or when circumstances change.
2. Indian Tax Residency Certificate (TRC) from the Indian tax authority (CBDT), issued per Section 90(4) of the Indian Income-tax Act. Request through your jurisdictional Assessing Officer. Validity 1 year.
3. Form 10F — an Indian prescribed form self-certifying additional information required to claim treaty benefits. From April 2023, must be filed electronically on the Indian income tax portal. Mandatory for non-resident claims.

Without all three documents, the US payer must withhold at the full 30% default. Many Indian service providers lose 15 percentage points of their US revenue by not providing the documents to the US customer at onboarding.

Section 90(2) of the Indian Income-tax Act 1961 says: where there is a DTAA, the taxpayer is entitled to the more beneficial of the DTAA rate or the Indian domestic rate. The treaty cannot be used to increase tax; only to reduce.

Example: a Mauritius-India DTAA situation where domestic Indian law would tax at 20% but the DTAA caps at 10%, the taxpayer gets 10%. Conversely, if domestic Indian law allows a 5% rate and the DTAA says 10%, the taxpayer gets 5%.

For India-US flows, Section 90(2) matters when claiming foreign tax credit on US tax paid against Indian tax liability. The credit is capped at the lower of (a) US tax actually paid and (b) Indian tax that would have been payable on the same income.