India-Australia DTAA Practical Guide

Why the Australia-India DTAA Matters More Than Ever

The Double Taxation Avoidance Agreement between India and Australia, originally signed on 25 July 1991, has taken on renewed significance as bilateral trade surpasses AUD 50 billion annually and the Australia-India Economic Cooperation and Trade Agreement (ECTA) reshapes the economic relationship. For Australian companies with Indian subsidiaries, Indian companies with Australian operations, and individuals earning cross-border income, understanding the DTAA's practical mechanics is essential to avoiding tax leakage.

The India-Australia DTAA uses the credit method to eliminate double taxation: income is first taxed in the source country (where it arises), and the residence country then provides a credit for taxes paid abroad. This differs from some of India's other DTAAs that use the exemption method. The practical implication is that Australian companies must actively claim credits on their Australian tax returns for taxes withheld in India, and vice versa.

This guide covers the specific withholding rates, the claiming process, recent changes brought by ECTA and the Multilateral Instrument (MLI), capital gains treatment, permanent establishment rules, and common planning strategies.

Withholding Tax Rates Under the DTAA

The core benefit of the India-Australia DTAA is reduced withholding tax rates on cross-border payments. These rates apply when proper documentation (Tax Residency Certificate and Forms 145 and 146, formerly Forms 15CA and 15CB) is furnished before remittance. Without proper documentation, the higher domestic rates apply automatically.

A critical nuance: dividends and interest earned by government entities and certain institutions (such as the Reserve Bank of India or the Reserve Bank of Australia) are exempt from taxation in the source country under the DTAA. This is relevant for sovereign wealth fund investments and government-to-government financial arrangements.

The Royalty and FTS Distinction

Article 12 of the India-Australia DTAA has a unique structure that foreign investors must understand carefully. Unlike many other Indian DTAAs, the India-Australia treaty defines "royalties" broadly in Article 12(3)(g) to include payments for services that "make available" technical knowledge, experience, skill, know-how, or processes. This "make available" clause means that if the technical knowledge is transferred such that the recipient can use it independently afterward, the payment is classified as a royalty under the DTAA.

However, routine services where the provider retains the knowledge (monitoring, supervision, project management) do not constitute "making available" technical knowledge. Indian courts and the Authority for Advance Rulings (AAR) have consistently held that monitoring and supervision of project work does not amount to making available technical knowledge. This distinction can reduce the effective withholding rate from 15% (FTS) to potentially lower rates or business profits treatment.

ECTA Impact on Technical Services Taxation

The ECTA, which entered into force on 29 December 2022, made a significant change to the taxation of technical services. Australia unilaterally removed its deemed source taxation on payments made by Australian customers to Indian residents for technical services provided remotely that fall under Article 12(3)(g). This means Indian IT services companies providing remote technical services to Australian clients no longer face Australian withholding tax on those payments, eliminating the previous double taxation issue.

For Australian companies, this means that payments to Indian service providers for remote technical services are now treated as business profits of the Indian company, taxable only in India (unless the Indian company has a permanent establishment in Australia). This change has reduced the effective tax burden on Australia-India technology services trade by eliminating Australian deemed source taxation.

Capital Gains Treatment

Capital gains taxation under the India-Australia DTAA follows different rules depending on the type of asset:

Immovable Property

Capital gains from the sale of immovable property (real estate) are taxable in the country where the property is located. An Australian company selling land or buildings in India will be taxed on the capital gains in India, with the option to claim a credit in Australia.

Shares Deriving Value from Immovable Property

If shares of an Indian company derive more than 50% of their value from immovable property situated in India, capital gains on the sale of those shares may be taxed in India. This is particularly relevant for Australian investors in Indian real estate companies or companies with significant land holdings.

Business Property of a Permanent Establishment

Income or gains from the alienation of property that forms part of the business property of a permanent establishment may be taxed in the country where the PE is situated. If an Australian company has a PE in India and sells assets forming part of that PE's business property, India has the right to tax those gains.

Other Shares and Securities

For shares that do not derive their value primarily from immovable property, capital gains may be taxed in both countries with credit available in the country of residence. The current Indian domestic rates for capital gains are:

• Listed shares held over 12 months: 12.5% LTCG (above INR 1.25 lakh exemption)
• Unlisted shares held over 24 months: 12.5% LTCG without indexation
• Short-term capital gains: 20% for listed shares, applicable slab rates for unlisted shares

Permanent Establishment Rules

Article 5 of the DTAA defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. For Australian companies operating in India, understanding PE risk is critical because business profits are only taxable in India if the Australian company has a PE there.

What Creates a PE in India

A PE is created through a fixed place of business (office, factory, workshop, warehouse), a construction or installation project lasting more than 183 days, the furnishing of services (including consultancy) through employees present in India for more than 183 days in any 12-month period, or a dependent agent who habitually exercises authority to conclude contracts on behalf of the Australian company in India.

What Does NOT Create a PE

Activities that are preparatory or auxiliary in character do not create a PE. This includes maintaining a stock of goods solely for storage, display, or delivery; maintaining a fixed place of business solely for purchasing goods; and maintaining a fixed place of business solely for advertising, research, or information gathering. However, the Multilateral Instrument (MLI) has modified some of these exceptions for the India-Australia DTAA.

MLI Modifications

India and Australia are both signatories to the OECD's Multilateral Instrument, which has modified certain provisions of the India-Australia DTAA. Key MLI modifications include the Principal Purpose Test (PPT), which denies treaty benefits if one of the principal purposes of an arrangement was to obtain those benefits, and tightened PE definitions to address artificial avoidance of PE status through commissionnaire arrangements and specific activity exemptions. Both tax administrations have increased substance requirements, with tighter monitoring of treaty benefit entitlements as of 2025.

Step-by-Step Process for Claiming DTAA Benefits

The process for claiming reduced withholding rates under the India-Australia DTAA involves specific documentation that must be in place before the remittance is made.

Step 1: Obtain Tax Residency Certificate (TRC)

The Australian company or individual must obtain a TRC from the Australian Taxation Office (ATO) confirming tax residency in Australia for the relevant financial year. The TRC is the primary document proving eligibility for DTAA benefits. Without it, no DTAA benefit can be claimed. The TRC must specify the taxpayer's name, tax identification number (TFN or ABN), period of residency, and confirmation of tax liability in Australia.

Step 2: Prepare Form 41 (formerly Form 10F)

If the TRC issued by the ATO does not contain all information required by Indian authorities, the recipient must also file Form 41 with the Indian tax authorities. Form 41 requires the taxpayer's status (individual, company, etc.), nationality, TIN, period of residency, and address in the country of residence.

Step 3: Furnish Documents to Indian Payer

Before the remittance is made, the Australian recipient must provide the TRC, Form 41 (if required), a no-PE declaration (confirming no permanent establishment in India), and PAN (Permanent Account Number) in India, if obtained. The Indian payer (subsidiary or service recipient) needs these documents to apply the reduced DTAA rate rather than the higher domestic rate. Where the recipient has no PAN, section 397(2) of the Income-tax Act, 2025 (section 206AA of the Income-tax Act, 1961) requires deduction at a higher rate, with the 20% floor at section 397(2)(b)(i)(C). The relief that previously allowed a non-resident to furnish a TRC and a foreign tax identification number in place of a PAN is now expressed as being available only as may be prescribed, so treat it as subject to rules to be prescribed and confirm the position before relying on it.

Step 4: File Form 146

The Indian payer must obtain a certificate from a Chartered Accountant in Form 146 for remittances exceeding INR 5 lakh in a financial year that are chargeable to tax. The CA verifies compliance with section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the applicable DTAA rate, the nature and purpose of the payment, and deduction of tax at the correct rate.

Step 5: File Form 145

Based on the Form 146 certificate, the Indian payer files Form 145 electronically on the income tax portal before making the remittance. The bank will not process the foreign remittance without a valid Form 145. Form 145 has four parts; Part C applies when a CA certificate (Form 146) has been obtained and the remittance is covered under a DTAA.

Step 6: Claim Foreign Tax Credit in Australia

The Australian recipient claims a foreign tax credit on their Australian tax return for the tax withheld in India. Australia provides credit for Indian taxes paid, limited to the Australian tax payable on the relevant income. If the Indian withholding exceeds the Australian tax liability on that income, the excess credit may be carried forward depending on Australian tax rules.

Practical Tax Planning Strategies

Structuring Intercompany Payments

Australian companies with Indian subsidiaries should structure intercompany payments to optimise the DTAA benefit. Transfer pricing documentation must support the arm's length nature of all payments. Management fees, cost allocation arrangements, and technology licensing fees should be structured to clearly fall within specific DTAA articles rather than leaving classification ambiguous.

Dividend vs. Management Fee Optimisation

Both dividends and management fees from an Indian subsidiary to an Australian parent face 15% withholding under the DTAA. However, management fees are deductible expenses for the Indian subsidiary (reducing its corporate tax liability at 25.17% effective rate), while dividends are paid from post-tax profits. The net cost of repatriating INR 100 as a management fee (assuming deductibility) versus a dividend can differ by 8-12 percentage points. Proper transfer pricing documentation is essential to support management fee deductions.

Royalty Structure Optimisation

The 10% rate for royalties relating to the use of industrial, commercial, or scientific equipment is lower than the 15% rate for other royalties and FTS. Where an Australian company provides both equipment and technical know-how to its Indian subsidiary, properly segregating the consideration between equipment use (10%) and technical services (15%) can reduce the blended withholding rate.

Advance Pricing Agreements

India has signed bilateral APAs with Australia, allowing both countries' tax authorities to agree in advance on transfer pricing methodologies for intercompany transactions. For Australian companies with significant ongoing intercompany transactions with Indian subsidiaries (exceeding INR 10 crore annually), a bilateral APA eliminates transfer pricing uncertainty for 5-9 years. The process takes 24-36 months but provides certainty that significantly outweighs the investment in time and professional fees.

ECTA and CECA: The Trade Agreement Overlay

The India-Australia DTAA does not operate in isolation. The Australia-India Economic Cooperation and Trade Agreement (ECTA), which entered into force on 29 December 2022, has progressively eliminated tariffs on goods trade. As of January 2026, every Indian product entering Australia does so at zero tariff, giving Indian subsidiaries of Australian companies unfettered export access to a nearly AUD 2 trillion economy. Both countries are targeting bilateral trade of AUD 100 billion by 2030.

Negotiations are ongoing for a broader Comprehensive Economic Cooperation Agreement (CECA), which will extend beyond goods to cover services, investment, digital trade, education, and critical minerals supply chains. Ten formal rounds and inter-sessional discussions have been held, with a stocktake in New Delhi in December 2024. For Australian companies with Indian operations, CECA is expected to introduce investment protection provisions, streamlined work visa arrangements for intra-corporate transferees, and mutual recognition of professional qualifications that will complement the DTAA's tax benefits.

The practical implication for investment structuring: Australian companies should design their India operations to take advantage of both the DTAA (for tax efficiency on intercompany payments) and ECTA/CECA (for tariff-free goods movement and services market access). A manufacturing subsidiary in India that exports finished goods to Australia benefits from zero tariffs under ECTA, while technology licensing fees from the same subsidiary to the Australian parent benefit from the 10-15% DTAA withholding rates.

Common Mistakes When Claiming DTAA Benefits

Filing Form 145 After Remittance

Form 145 must be filed before the remittance is processed by the bank. Filing after remittance triggers penalties and the bank may have already applied domestic withholding rates. Ensure the Form 146 from the CA and the subsequent Form 145 filing are completed before instructing the bank to process the payment.

Using an Expired or Incorrect TRC

The TRC must be valid for the financial year in which the remittance is made. A TRC issued for a previous year cannot be used for current-year remittances. Request a fresh TRC from the ATO for each Indian financial year (April-March) during which remittances are expected.

Not Maintaining PE Documentation

Australian companies providing services in India through visiting employees must track the number of days their employees spend in India. If the 183-day threshold is crossed in any 12-month period, a service PE is created, and business profits become taxable in India. Maintain a travel log and PE risk assessment for all personnel deployed to India.

Ignoring the MLI Principal Purpose Test

Post-MLI, the Principal Purpose Test can deny DTAA benefits if one of the principal purposes of an arrangement was to obtain treaty benefits. Structures designed primarily for treaty shopping (for example, routing investments through Australia solely to access the India-Australia DTAA rates) will fail the PPT. Ensure economic substance supports the structure.

Recent Developments and 2025-2026 Updates

New Income-Tax Act 2025

India passed a new Income-tax Act in August 2025 to simplify and consolidate the existing tax framework, and it came into force on 1 April 2026. It governs tax year 2026-27 onward; under section 536(2)(c) the Income-tax Act, 1961 continues to apply to any tax year beginning before 1 April 2026, so both Acts are live law for different years. The provisions this guide relies on were renumbered rather than repealed. TDS on payments to non-residents is section 393(2). DTAA relief is section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961), with the rule that the treaty applies where it is more beneficial at section 159(4), the specified-association route at section 159(2) (section 90A of the 1961 Act), and the TRC requirement at section 159(8). Higher TDS in the absence of a PAN is section 397(2). The Income-tax Act, 2025 carries no counterpart to section 206AB of the 1961 Act (higher TDS on non-filers of returns). The DTAA itself remains unchanged by the new Act; India's tax treaties operate independently of domestic law changes and continue to apply as negotiated bilaterally.

Increased Substance Requirements

Both the ATO and Indian tax authorities have tightened monitoring of treaty benefit entitlements as of 2025. The ATO now requires more detailed disclosure of foreign income and treaty claims on Australian tax returns. Indian authorities are applying greater scrutiny to beneficial ownership claims and are more frequently denying DTAA benefits where the recipient cannot demonstrate genuine economic substance in the residence country. FEMA compliance advisors can assist with structuring treaty claims properly. Australian companies should ensure that entities claiming DTAA benefits have real business operations, management, and decision-making in Australia, not just paper incorporation.

Digital Services and Remote Work Implications

The growth of remote work arrangements between Australia and India creates new PE risk scenarios. An Australian company whose Indian employees work remotely from India (rather than from Australia) may inadvertently create a service PE in India if the employees are performing services for the Australian company from India for more than 183 days. Companies with hybrid work arrangements involving India-based staff should conduct PE risk assessments annually. Similarly, digital services provided from India to Australian clients now benefit from the ECTA's removal of Australian deemed source taxation, but the Indian company must still assess whether it has a PE in Australia that would trigger Australian tax obligations on the business profits.

Practical Example: Dividend Repatriation

Consider an Australian company with a wholly-owned Indian subsidiary that earns INR 10 crore in profit after tax. If the subsidiary declares a 50% dividend (INR 5 crore), the Indian withholding tax under the DTAA is 15% (INR 75 lakh), compared to 20% plus surcharge and cess (approximately INR 1.17 crore) without the DTAA. The DTAA saves INR 42 lakh on this single dividend payment. Over five years of similar dividends, the cumulative saving exceeds INR 2 crore. However, this saving requires the TRC, Forms 41, 146 and 145 to be in place before each remittance. A single missed filing resets the withholding to the domestic rate, and recovering the excess withholding through an income tax refund claim can take 12-24 months.

Key Takeaways

• The India-Australia DTAA provides reduced withholding rates of 15% on dividends and interest, 10% on equipment-related royalties, and 15% on other royalties and FTS, compared to 20%+ domestic rates
• ECTA has eliminated Australian deemed source taxation on remote technical services provided by Indian companies to Australian clients, significantly reducing the double taxation burden on technology services trade
• Claiming DTAA benefits requires a valid TRC from the ATO, Form 41 (if needed), Form 146 from a CA, and Form 145 filed electronically before remittance
• Capital gains on shares deriving over 50% value from Indian immovable property are taxable in India; other share sales allow credit in the residence country
• Bilateral APAs are available between India and Australia, providing 5-9 years of transfer pricing certainty for companies with intercompany transactions exceeding INR 10 crore annually