Tax implication in foreign transaction
This query is : Resolved
21 August 2014
Respected Expert,
We are a software services provider company. Want to make a payment to our vendor who is giving similar services like software maintenance, Re-engineering, web designing. He is currently located in UAE and he is a Indian Non Resident. He provided bank details of UAE Bank our query is, how we can proceed for further payment. What will be the tax implication on us & on vendor ???
We are a software services provider company. Want to make a payment to our vendor who is giving similar services like software maintenance, Re-engineering, web designing. He is currently located in UAE and he is a Indian Non Resident. He provided bank details of UAE Bank our query is, how we can proceed for further payment. What will be the tax implication on us & on vendor ???
22 August 2014
you have to deduct the tds u/s 195 @ 10% if have PAN of india otherwise @ 20%.
then you make payment to vendor.
then you make payment to vendor.
22 August 2014
thanks for your reply....
but the person is settled in UAE & running business from UAE. All the activities doing from UAE only so we had to deduct TDS U/s 195 ? or made full payment in dirham (UAE Currency)
but the person is settled in UAE & running business from UAE. All the activities doing from UAE only so we had to deduct TDS U/s 195 ? or made full payment in dirham (UAE Currency)
26 July 2025
Here’s a clear explanation for your situation:
---
### Scenario:
* Your Indian company is paying a vendor for software services.
* Vendor is an Indian non-resident but **residing and doing business in UAE**.
* Vendor provided UAE bank details.
* You want to know about **TDS deduction under Section 195** and how to proceed.
---
### Tax Implications & Process:
1. **Applicability of TDS under Section 195:**
* Section 195 requires deduction of tax on any **payment made to a non-resident** which is chargeable to tax in India.
* **Since the vendor is a non-resident**, your company **must deduct TDS** on payment made to him, **if the income is taxable in India**.
2. **Is the income taxable in India?**
* Payments for software maintenance, re-engineering, and web designing are **fees for technical services** or **royalty** depending on the contract.
* If the services are **performed outside India** (i.e., vendor is doing all work from UAE), then the income may **not be taxable in India** under the India-UAE Double Tax Avoidance Agreement (DTAA).
* But as a payer, your company **must verify** if TDS is required and get a certificate/exemption if applicable.
3. **How to proceed?**
* **Step 1:** Obtain vendor’s **Tax Residency Certificate (TRC)** from UAE tax authorities.
* **Step 2:** Verify the **DTAA provisions** between India and UAE for this type of service income.
* **Step 3:** Vendor can apply to Indian Income Tax Department for **Lower or Nil withholding certificate** under Section 195(2).
* **Step 4:** If no certificate obtained, deduct TDS @ 10% if vendor provides PAN, else @ 20%.
* **Step 5:** Make payment in UAE Dirhams to the vendor’s UAE bank account after deducting TDS.
* **Step 6:** Deposit TDS in India and provide TDS certificate to the vendor.
4. **If the vendor is doing all work in UAE:**
* Under DTAA, the income may not be taxable in India, so vendor can claim refund of TDS after filing Indian tax return.
* Alternatively, vendor can get a nil deduction certificate from Indian tax authorities to avoid TDS upfront.
---
### Summary:
| Aspect | Your Action | Vendor Impact |
| ---------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------- |
| Vendor is non-resident | Deduct TDS under Section 195 (provisionally) | Income may be taxable in India, but possibly exempt under DTAA |
| Vendor’s tax residence | Obtain Tax Residency Certificate (TRC) | Supports claim for exemption/reduced TDS |
| Payment currency | Payment can be made in UAE Dirham | Receipt of payment in foreign currency |
| Claim of refund or exemption | Vendor may file Indian tax return to claim TDS refund if applicable | Vendor may save tax by claiming DTAA benefits |
---
If you want, I can help you draft a TDS deduction letter or help with specific DTAA clauses for India-UAE. Would that help?
---
### Scenario:
* Your Indian company is paying a vendor for software services.
* Vendor is an Indian non-resident but **residing and doing business in UAE**.
* Vendor provided UAE bank details.
* You want to know about **TDS deduction under Section 195** and how to proceed.
---
### Tax Implications & Process:
1. **Applicability of TDS under Section 195:**
* Section 195 requires deduction of tax on any **payment made to a non-resident** which is chargeable to tax in India.
* **Since the vendor is a non-resident**, your company **must deduct TDS** on payment made to him, **if the income is taxable in India**.
2. **Is the income taxable in India?**
* Payments for software maintenance, re-engineering, and web designing are **fees for technical services** or **royalty** depending on the contract.
* If the services are **performed outside India** (i.e., vendor is doing all work from UAE), then the income may **not be taxable in India** under the India-UAE Double Tax Avoidance Agreement (DTAA).
* But as a payer, your company **must verify** if TDS is required and get a certificate/exemption if applicable.
3. **How to proceed?**
* **Step 1:** Obtain vendor’s **Tax Residency Certificate (TRC)** from UAE tax authorities.
* **Step 2:** Verify the **DTAA provisions** between India and UAE for this type of service income.
* **Step 3:** Vendor can apply to Indian Income Tax Department for **Lower or Nil withholding certificate** under Section 195(2).
* **Step 4:** If no certificate obtained, deduct TDS @ 10% if vendor provides PAN, else @ 20%.
* **Step 5:** Make payment in UAE Dirhams to the vendor’s UAE bank account after deducting TDS.
* **Step 6:** Deposit TDS in India and provide TDS certificate to the vendor.
4. **If the vendor is doing all work in UAE:**
* Under DTAA, the income may not be taxable in India, so vendor can claim refund of TDS after filing Indian tax return.
* Alternatively, vendor can get a nil deduction certificate from Indian tax authorities to avoid TDS upfront.
---
### Summary:
| Aspect | Your Action | Vendor Impact |
| ---------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------- |
| Vendor is non-resident | Deduct TDS under Section 195 (provisionally) | Income may be taxable in India, but possibly exempt under DTAA |
| Vendor’s tax residence | Obtain Tax Residency Certificate (TRC) | Supports claim for exemption/reduced TDS |
| Payment currency | Payment can be made in UAE Dirham | Receipt of payment in foreign currency |
| Claim of refund or exemption | Vendor may file Indian tax return to claim TDS refund if applicable | Vendor may save tax by claiming DTAA benefits |
---
If you want, I can help you draft a TDS deduction letter or help with specific DTAA clauses for India-UAE. Would that help?
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