Do we have to deduct tax paying a consultant outside India?
The starting point is that the duty to decide sits with you, the payer. You have to determine whether the payment is chargeable in India before you remit, and you carry the consequences if you decide wrongly: your own liability for the amount that should have been deducted, and a disallowed deduction for the expense itself. So the decision is not a formality to be signed off by the bank. It is a written determination you keep. The question underneath it is what the payment is, whether technical services, a royalty, or business profits, because that characterisation is what sets the rate.
What do we need from a foreign consultant to use the treaty rate?
A tax residency certificate from the consultant's own revenue authority, and a declaration from the consultant. Without them the treaty rate is not available to you, however clearly the treaty appears to apply, and the deduction falls to be made on the domestic basis. Ask for both before the first invoice rather than at the point of remittance, because a consultant who has never needed a residency certificate will take weeks to obtain one and the payment stalls in the meantime. Keep them on file for the period they cover and diarise the renewal. They are not indefinite.
Can the bank release our remittance without a certificate?
Expect to produce the declaration, and in most cases an accountant's certificate on the payment, before the remittance goes out. That is the point at which unresolved characterisation questions surface, which is why they should be settled earlier. The practical failure is sequencing. The invoice is approved, the payment is scheduled, and only then does someone ask what the payment is for tax purposes and discover the consultant's residency certificate does not exist. Settle characterisation and collect the consultant's documents when the contract is signed, and the remittance file assembles itself each month.
What happens if we under-deduct on a payment to a foreign consultant?
Two consequences, and they are separate. You become liable for the shortfall yourself, because the obligation was yours rather than the consultant's. And the expense can be disallowed in computing your own income, so the cost of the consultant stops being deductible. That second one is what turns a modest deduction question into a material one, and it is why a determination made properly at the time is worth more than an argument made later. If past payments went out with no determination at all, deal with them deliberately rather than waiting to be asked.
Is a consultancy fee a royalty or a fee for technical services?
It depends on what the consultant actually supplies and what the contract gives you, not on the word used on the invoice. The same engagement can look like technical services, a royalty, or business profits depending on whether you are buying work, the right to use something, or output from a business the consultant carries on. The rate follows that characterisation, so the analysis has to come first. Where a contract does both, a licence plus support being the common case, the sensible course is to split the consideration in the contract itself and characterise each leg.
Does it matter that the consultant never came to India?
It is relevant but it does not settle the question on its own. The determination you have to make is whether the payment is chargeable in India, and that turns on the character of the payment as much as on where the work was physically done. Plenty of payments to people who have never entered the country are chargeable. So do not treat a consultant working in another country as automatically outside the net. Make the determination on the characterisation, record the reasoning, and keep it with the contract and the remittance papers.
How does a remittance actually work, and is it taxed?
A remittance is a transfer of money, not a category of income, and moving your own funds between your own accounts is not what creates tax. What can create tax is the income behind the money and the rules of the country it leaves. India, for instance, collects tax at source when a resident individual remits abroad under the Liberalised Remittance Scheme, and requires certification before certain payments leave. The transfer is the trigger for paperwork rather than for tax. See the LRS and tax collected at source.
What is a DTAA?
Double Taxation Avoidance Agreement — India's name for a tax treaty. It does the same work as any treaty: allocates taxing rights between India and the other country, caps Indian withholding on payments abroad, and sets out whether relief comes by exemption or by credit. To use one you generally need a tax residency certificate from the other country, Form 10F, and a PAN in the deductor's records. See DTAA relief between India and Canada.
