Cross-Border Payments and Withholding Tax: A CA's Checklist

An Indian company hires a US-based consultant, licenses software from an Irish vendor, or pays a design fee to a freelancer in the UK, and then discovers the payment can't simply be wired out. Any payment to a non-resident that's taxable in India has to be routed through a specific withholding and reporting process before the money leaves the country, and banks won't process the remittance without proof that it's been followed. Getting this wrong doesn't just risk a tax notice, it can cost the Indian company its own tax deduction for the expense. Here's the mechanics a practising CA actually checks before signing off on a cross-border payment. Skip a step, and the fallout isn't limited to interest, it can quietly cost the Indian company a deduction worth far more than the tax originally at stake.

Section 195: The Withholding Obligation Almost Nobody Reads Closely

Section 195 is deceptively broad. It applies to any person, not just companies, making any payment to a non-resident of any sum that's chargeable to tax in India, and unlike the domestic TDS provisions that kick in only above a threshold, it has no minimum amount, if even a portion of the payment represents India-taxable income, withholding applies to that portion from the first rupee. It covers far more than salary or professional fees: royalties, fees for technical services, interest, capital gains, and ordinary business income all fall within its scope whenever India has the right to tax them. The obligation sits with the payer, at the time of crediting the sum or making payment, whichever happens first, and the payer, not the foreign recipient, carries the risk if the rate applied turns out to be wrong.

The applicable rate isn't a single fixed number, it's whichever is lower between the rate prescribed under the Income Tax Act, plus applicable surcharge and cess, and the rate specified in the relevant DTAA, provided the non-resident actually claims the treaty benefit. Claiming it isn't automatic: the payee needs to furnish a Tax Residency Certificate from their home country, a self-declaration in Form 10F, and typically a confirmation that the income isn't connected to a permanent establishment or business presence they maintain in India. Skip any of these, and the payer is left applying the higher domestic rate by default, or worse, applying a treaty rate without the backup to support it if the claim is ever questioned. Where the payer or payee believes only part of a payment is genuinely taxable, an application under Section 195 or a lower-deduction certificate under Section 197 lets that lower figure be fixed in advance rather than argued about after the money has already moved. Contracts that promise the foreign vendor a fixed net amount add a further complication, since the Indian payer ends up grossing up the payment so the agreed sum survives after tax, pushing the real cost of the contract higher than the invoice figure suggests.

Form 15CA and Form 15CB: The Process Itself

Form 15CA is the remitter's own electronic declaration on the income tax portal, filed under one of four parts depending on whether the payment is taxable at all and how large it is. Form 15CB is different in kind, it's a certificate from a practising chartered accountant, independent of the remitter, examining the nature of the payment and the applicable treaty position, and confirming the tax that should be withheld. Once aggregate remittances to a payee cross around ₹5 lakh in a year, and the payment is taxable with no existing lower-deduction order to rely on, Form 15CB becomes mandatory before the corresponding part of Form 15CA can be filed. Both are then handed to the authorised dealer bank alongside the standard foreign remittance form, and the bank won't release the funds without them. Worth flagging for anyone comparing notes with their CA: the Income Tax Act, 2025 has renamed these Form 145 and Form 146 respectively, though the underlying process hasn't fundamentally changed. In practice, the CA issuing Form 15CB is doing real due diligence here, checking the underlying agreement, the invoice, and the treaty position, not simply rubber-stamping a number the finance team hands over.

A Practical Pre-Remittance Checklist

1. Confirm whether the payment is chargeable to tax in India at all, based on the nature of the income and where it's deemed to arise
2. Identify the payee's country of tax residence and the exact DTAA article that applies to this type of payment
3. Collect the payee's PAN, or confirm a valid exemption, along with their Tax Residency Certificate, Form 10F, and a no-PE declaration
4. Compare the domestic withholding rate with the DTAA rate and apply the lower one, only once the supporting paperwork is complete
5. Check whether a Section 197 lower-deduction certificate or a Section 195 order already covers this specific payment
6. Determine whether Form 15CB is required, or whether the remittance qualifies for a specified exemption from CA certification
7. File the correct part of Form 15CA on the income tax portal before the remittance is made
8. Submit Form 15CA and 15CB, along with the bank's remittance form, to the authorised dealer processing the payment
9. Deposit the TDS with the government by the due date and report it correctly in the quarterly TDS return

What Happens When Withholding Goes Wrong

Getting withholding wrong doesn't just create a problem for the foreign payee, it lands squarely on the Indian payer. Fail to deduct, deduct at too low a rate, or deduct but not deposit the tax on time, and the payer can be treated as an assessee in default, on the hook for the shortfall itself, plus interest that accrues monthly until it's made good. The sharper cost usually isn't the shortfall, it's the disallowance rule: if tax that should have been withheld on a payment to a non-resident wasn't deducted or deposited, the entire expense can be disallowed in the payer's own tax computation, turning a routine vendor payment into a far larger tax hit than the missed withholding amount itself. Penalty proceedings can follow on top of that, particularly where the lapse looks like more than a one-off oversight. Multiply either cost across a year of recurring vendor payments, software subscriptions, consulting retainers, and licence fees, and a single overlooked payment type can turn into a much larger exposure across an entire tax audit.

None of this is optional paperwork bolted onto an otherwise simple international payment, it's the mechanism India uses to make sure tax on cross-border income gets collected before the money leaves the country. Building the checklist into the payment process itself, rather than treating it as a last-minute scramble before a remittance deadline, is what keeps a routine vendor payment from turning into a disallowed expense or a drawn-out dispute.