Understanding when foreign clients must deduct TDS on payments to Indian businesses.

Section 195 of the Income Tax Act governs withholding tax on payments made to non residents, but it also influences how Indian exporters and freelancers treat payments they receive from clients abroad. Many service exporters assume that foreign clients never deduct tax when paying for work delivered from India. In practice, whether withholding applies depends on the nature of the income, the client’s tax jurisdiction and whether the income is considered taxable in the client’s country.

To understand when Section 195 comes into play, you need to know what counts as income accruing or arising in India, how Double Taxation Avoidance Agreements (DTAA) work and which export receipts remain fully tax neutral for foreign buyers.

What Section 195 Covers and Why It Matters

Section 195 requires any person making a payment to a non-resident that is chargeable to tax in India to deduct tax at source (TDS). While this section is usually applied when Indian companies pay foreign vendors, it also guides how Indian businesses evaluate tax exposure on money received from abroad.

The key question is simple:

Is the payment chargeable to tax in India or in the other country based on where the service is performed and where the income arises?

If the answer is yes, withholding may apply. If not, the foreign client is not required to deduct tax.

When Cross Border Receipts Do NOT Attract Withholding Tax

For most service exporters, withholding does not apply because their income is not taxable in the client’s country. This is true when:

• The exporter performs all work from India.
• The service is consumed outside India.
• The exporter has no permanent establishment in the client’s country.
• The payment is treated as business income under the tax treaty.

Under these conditions, the foreign client usually pays the invoice in full without deducting tax. The income is taxable only in India and is declared under normal income tax or presumptive schemes.

• Examples: Software development, consulting, design, marketing support, content creation and other remote services delivered to international clients.

When Withholding May Apply Overseas (Foreign TDS)

A foreign client may deduct tax when their local tax laws treat the payment as taxable in their country. This does not relate to Section 195 directly, but the principle is similar: tax must be deducted if income is taxable at the source.

Common cases include:

• The Indian exporter has a permanent establishment, fixed office or agent in the client’s country.
• Work is partly performed in the foreign country.
• The service is classified as royalty or technical service under local rules.
• Local regulations mandate withholding for cross border payments regardless of where the work is done.

In such cases, the foreign company may deduct a percentage before paying the Indian exporter. The Indian exporter can usually claim a tax credit for this deduction under the Double Taxation Avoidance Agreement (DTAA).

How DTAA Affects Withholding

Double Taxation Avoidance Agreements decide where income should be taxed. For business income, the usual rule is simple:

A country can only tax business income of a foreign seller if that seller has a permanent establishment (PE) in that country.

If an Indian exporter has no office or presence abroad, their income is not taxable there. The foreign client cannot withhold tax because the DTAA overrides domestic rules. This is why most freelancers and agencies do not face any deductions on export invoices.

Special Cases Where Withholding Becomes Likely

While most service exporters never encounter foreign withholding, a few categories regularly trigger deductions:

• Royalty and Technical Service Fees: Payments for licensing, proprietary content, software use, consulting advice delivered on site or specialised technical input may be classified as taxable in the client’s country. Royalty rules differ widely. Some countries apply withholding even for remote licensing transactions.
• On-site Services: If the Indian exporter physically visits the client’s country, even briefly, the income may be considered partly connected to that jurisdiction.
• Long-Term Presence Abroad: If the exporter’s staff or founders spend long periods in the client’s country, a tax nexus or permanent establishment risk may arise.
• Services Controlled by Local Regulations: Some countries mandate withholding on cross border payments even when the DTAA provides relief. In those cases, exporters need to document treaty benefits or seek advance rulings.

Why Clear Invoicing and Work Descriptions Matter

Export invoices should state clearly:

• What service was provided
• Where it was performed
• That the service was delivered from India
• That no presence exists in the client’s country

This helps the client classify the payment correctly and avoid unnecessary withholding. Ambiguous invoices often lead clients to apply withholding to stay safe.

Link Between Withholding and Inward Remittance Documentation

For service exporters in India, inward remittance documentation such as FIRA or bank advice normally records the gross amount received. If a foreign client deducts withholding tax, the document may reflect only the net receipt.

In such cases, exporters must maintain separate records showing:

• Invoice value
• Tax amount withheld
• Net amount received

This ensures tax credit can be claimed in India by showing proof of deduction.

Where BRISKPE Supports Exporters in This Process

BRISKPE handles inward remittances for service exporters by issuing clear documentation of the payment received, currency conversion rate and purpose code mapping. While withholding tax is determined by the foreign client’s jurisdiction, the clarity of inward remittance documentation helps exporters reconcile invoices, claim credits and maintain clean audit trails for both Indian tax and GST purposes.

Because BRISKPE focuses on export transactions, the settlement and documentation process aligns naturally with compliance requirements under Indian law, reducing confusion when withholding is involved.

Final Thoughts

Cross border receipts generally attract withholding tax only when the income is considered taxable in the foreign client’s country. Most Indian service exporters do not fall into this category because their work is performed in India and their income is taxable only here. Withholding becomes relevant only in special cases where royalty rules, technical service classifications or permanent establishments come into play.

Understanding when withholding applies helps exporters issue clean invoices, avoid unnecessary deductions and claim tax credits wherever applicable.