Key takeaways
  • Under domestic law, payments for software and online services can be royalty taxable at 20% plus surcharge and cess; under most treaties, a subscription that grants only the right to use — no copyright rights — is business profits, not taxable in India without a PE (Engineering Analysis, Supreme Court, 2021).
  • Treaty relief requires the vendor's Tax Residency Certificate and Form 41 (old 10F); without them the domestic rate applies, and the Indian payer bears the cost through grossing-up or disallowance.
  • Forms 145 and 146 apply vendor by vendor: taxable-but-treaty-relieved payments above ₹5 lakh a year need Form 146 and Form 145 Part C, even where the withholding is nil.
  • The equalisation levy no longer applies (2% ended 1 August 2024; 6% ended 1 April 2025); GST on these services is payable by the Indian business under reverse charge and is creditable.

The domestic charge

Section 9 of the Income-tax Act, 2025 carries forward the 2012 explanations that deem consideration for the use of, or right to use, computer software — and for the use of industrial, commercial or scientific equipment — to be royalty, regardless of the medium or of possession. On that footing, a SaaS subscription, a cloud hosting bill or a software licence paid to a foreign vendor is royalty under the Act, taxable at 20% plus surcharge and cess under section 207 and subject to withholding under section 393(2).

The treaty answer

Most of India's treaties define royalty in terms of payments for the use of, or right to use, a copyright (and patents, trademarks, know-how, equipment). In Engineering Analysis Centre of Excellence v CIT (2021) the Supreme Court held that where an Indian customer or distributor acquires only the right to use a copyrighted programme — no right to reproduce, adapt or distribute the copyright itself — the payment is not royalty under the treaty; it is business profits, taxable in India only through a PE. The judgment covered end-user licences, distributor arrangements and bundled software, and its reasoning applies to SaaS and cloud subscriptions where the customer accesses functionality without acquiring copyright rights. Where the vendor is resident in a treaty country and the treaty's royalty article follows the OECD pattern, the Indian payer may therefore apply nil withholding — with the vendor's TRC, Form 41 and (for business-profits treatment) a no-PE declaration on file.

Three qualifications. First, treaties with an equipment rental limb (India–US at 10%) can catch infrastructure-as-a-service where the customer controls dedicated hardware; most multi-tenant cloud does not fit that description, but the contract should be read. Second, a few treaties define royalty more broadly or have no favourable text; for vendors in non-treaty countries the domestic charge applies in full. Third, services bundled with the software — implementation, customisation, training — may be fees for technical services with their own make-available analysis.

What the Indian payer must do, per vendor

  1. Classify from the contract: right-to-use subscription (business profits under treaty), copyright licence (royalty), equipment (royalty or business profits by treaty), bundled services (FTS analysis).
  2. Collect documents: TRC covering the payment period; Form 41 filed by the vendor on the Indian e-filing portal; no-PE declaration. Large vendors publish these on request; small vendors often will not, in which case withhold at the domestic rate or gross up.
  3. Decide the rate: nil under treaty with documents; 10%/15% where the treaty royalty article applies; 20% plus surcharge and cess without documents or treaty.
  4. File the forms: the payment is chargeable under the Act (royalty) even if relieved by treaty, so if payments to that vendor in the tax year exceed ₹5 lakh, obtain Form 146 and file Form 145 Part C before each remittance; below ₹5 lakh, Part A. Card payments routed through the bank are remittances too — the forms obligation attaches to the payer, not to the payment channel.
  5. GST: pay IGST at 18% under reverse charge on the subscription as an import of OIDAR services (section 13(12) IGST), issue a self-invoice within 30 days, and claim input tax credit.
  6. Deductibility: an expense on which tax should have been withheld and was not is disallowed in the payer's computation until the tax is paid.

The equalisation levy is gone

The 2% levy on non-resident e-commerce operators (which covered many SaaS vendors) was withdrawn for consideration received on or after 1 August 2024, and the 6% levy on online advertising from 1 April 2025. Payments for online advertising — Google, Meta, LinkedIn — are now tested only under the income-tax royalty/FTS and treaty analysis (generally business profits, nil withholding with documents) and GST reverse charge.

Practical arrangements

  • Maintain a vendor master with country, treaty, classification, TRC expiry and Form 41 acknowledgement; renew annually.
  • For vendors who refuse documents, negotiate a grossed-up price or switch to an Indian reseller (whose invoices carry GST and attract domestic TDS under the normal provisions).
  • Batch Form 146 certification by vendor at the start of the year where the facts are stable, with Form 145 Part C per remittance.
  • Keep contracts: the CA certifying Form 146 classifies from the licence terms, not the invoice line "subscription".

Frequently asked questions

Is TDS deductible on payments to foreign SaaS companies?

Under domestic law the payment is royalty at 20% plus surcharge and cess. Under most treaties a subscription that grants only the right to use the software is business profits, not taxable without a PE (Engineering Analysis, 2021), so withholding is nil if the vendor's TRC, Form 41 and no-PE declaration are on file.

What if the vendor will not give a TRC or Form 41?

Withhold at the domestic rate (20% plus surcharge and cess) or gross up the payment. Alternatively buy through an Indian reseller, whose invoices fall under domestic TDS and GST.

Do I need Form 146 if no tax is being deducted?

Yes, where the payment is chargeable under the Act but relieved by treaty and payments to that vendor exceed ₹5 lakh in the tax year. Form 146 certifies the nil deduction and Form 145 Part C is filed against it.

Does the equalisation levy apply to SaaS or online advertising?

No longer. The 2% levy ended on 1 August 2024 and the 6% levy on online advertising on 1 April 2025.

Is GST payable on foreign SaaS subscriptions?

Yes. A GST-registered Indian business pays IGST at 18% under reverse charge on the import of OIDAR services and claims input tax credit.

Does paying by corporate credit card change anything?

No. The withholding and Forms 145/146 obligations attach to the Indian payer irrespective of the payment channel; card payments are foreign remittances.

Sources

Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.

Last reviewed on 1 November 2026 by Vidushi Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.