FTS Tax Rate Between India and China Under DTAA

Fees for Technical Services Tax Rate Between India and China

The India-China Double Taxation Avoidance Agreement (DTAA), signed on 18 July 1994 and amended through a protocol on 26 November 2018, caps the withholding tax rate on fees for technical services (FTS) at 10% of the gross amount under Article 12. FTS is defined broadly in the treaty to include payments for managerial, technical, or consultancy services rendered by a resident of one Contracting State to a payer in the other.

Following the Finance Act 2023, India's domestic withholding tax on FTS under Section 115A was doubled from 10% to 20%. With surcharge and 4% health & education cess, the effective domestic rate now reaches approximately 20.8% for non-corporate non-residents and 21.84% for foreign companies. The DTAA rate of 10% therefore delivers savings exceeding 10% on every FTS payment between India and China.

The India-China DTAA treats FTS within the same Article 12 as royalties, applying an identical 10% rate to both. This combined treatment simplifies compliance but raises important classification questions about whether a particular payment constitutes FTS, royalties, or business profits — each carrying different tax consequences.

Treaty Rate vs Domestic Rate: Detailed Comparison

The post-2023 rate differential makes treaty benefits critical for India-China technical service arrangements:

Before the Finance Act 2023 amendment, the domestic FTS rate under Section 115A was 10%, making the treaty rate only marginally beneficial (eliminating surcharge and cess). Since 1 April 2023, the domestic rate doubled to 20%, transforming the 10% treaty rate from a minor optimisation into an essential tax planning tool. Chinese companies providing technical, managerial, or consultancy services to Indian entities now save over 10% on every payment by claiming treaty benefits.

On China's side, domestic withholding tax on service fees paid to non-residents is 10% under Enterprise Income Tax Law, subject to certain conditions. The DTAA provides reciprocal protection for Indian service providers receiving FTS payments from Chinese entities.

For structuring cross-border service arrangements, consult our tax advisory and transfer pricing services.

Who Qualifies for the Reduced Rate

Claiming the 10% treaty rate on FTS requires meeting several conditions under Article 12 and the treaty's general anti-abuse provisions:

Beneficial Ownership Requirement

Article 12(2) restricts the reduced rate to FTS where the beneficial owner of the fees is a resident of the other Contracting State. The beneficial owner must have genuine economic entitlement to the income — not merely receive it as an intermediary or agent obligated to pass it on. Back-to-back service arrangements where a Chinese entity subcontracts the actual work to a third-country entity are vulnerable to denial of treaty benefits.

Definition of FTS — Article 12(4)

Under the India-China DTAA, fees for technical services means payments of any kind in consideration for the rendering of managerial, technical, or consultancy services, including the provision of services of technical or other personnel. This definition is broad and does not include a "make available" requirement — a critical distinction from DTAAs with countries like the USA and UK. Any payment for managerial, technical, or consultancy services qualifies as FTS, regardless of whether the recipient enables the payer to independently apply the technical knowledge.

No Permanent Establishment Connection

If the beneficial owner carries on business through a permanent establishment (PE) in the source state, and the services generating the FTS are effectively connected with that PE, the fees are taxed as business profits under Article 7. A Chinese consulting firm with a project office or PE in India cannot claim the 10% FTS rate on service fees connected to its Indian PE — such fees are subject to net-basis taxation at up to 35%.

Principal Purpose Test (PPT) — Article 27A

The 2018 Protocol introduced a Principal Purpose Test aligned with BEPS Action 6. Arrangements where obtaining the 10% FTS rate is one of the principal purposes may be denied treaty benefits. This targets service fee routing structures and interposition of Chinese entities to access the treaty rate.

India's GAAR Provisions

India's General Anti-Avoidance Rules under Chapter X-A of the Income Tax Act, effective from 1 April 2017, independently deny treaty benefits for arrangements lacking commercial substance. A service contract structured primarily to access the treaty rate, without genuine business rationale for engaging the Chinese entity, is vulnerable to GAAR scrutiny.

FTS-Specific Treaty Provisions Under Article 12

Article 12 addresses both royalties and FTS in a combined provision. The key FTS-specific elements include:

Article 12(1): Primary Taxing Right

FTS arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. The residence state has the primary right to tax FTS income.

Article 12(2): Source State Rate Cap

The source state may also tax FTS, but the tax shall not exceed 10% of the gross amount of the fees if the beneficial owner is a resident of the other Contracting State. This is a flat rate with no tiering based on the type of service, the service provider's status, or the quantum of fees.

Article 12(4): Definition of FTS

The term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any managerial, technical, or consultancy services, including the provision of services of technical or other personnel. This definition excludes:

• Payments to employees of the payer (covered under employment income provisions)
• Payments for teaching or instruction in educational institutions
• Payments for services mentioned in Article 14 (independent personal services) or Article 15 (dependent personal services)

The breadth of this definition — covering managerial, technical, and consultancy services without a "make available" filter — means virtually any professional service provided by a Chinese entity to an Indian payer can qualify as FTS under the India-China DTAA.

Article 12(5): PE Exception

If the beneficial owner has a PE in the source state and the services are effectively connected with that PE, Article 12 does not apply. Instead, the FTS is taxed as business profits under Article 7, subject to net-basis taxation at applicable corporate rates.

Documentation Required for Claiming the Reduced Rate

Indian entities paying FTS to Chinese service providers must maintain proper documentation before applying the 10% treaty rate:

Tax Residency Certificate (TRC)

The Chinese service provider must obtain a valid Tax Residency Certificate (TRC) from China's State Taxation Administration confirming tax residency in China for the relevant financial year.

Form 10F

Under Section 90(5) of the Income Tax Act read with Rule 21AB, the non-resident must furnish Form 10F to the Indian payer. This self-declaration provides supplementary information including the assessee's status, nationality, PAN (if applicable), and period of residential status in China.

Self-Declaration and No-PE Certificate

A self-declaration confirming that: (a) the Chinese entity is the beneficial owner of the FTS; (b) the services are not effectively connected with a PE in India; and (c) the service arrangement is not part of a conduit structure designed primarily to access treaty benefits.

Service Agreement and Deliverables

The underlying service agreement, statements of work, and evidence of service delivery should be maintained. For transfer pricing purposes, the agreement should clearly specify the nature of services, deliverables, timelines, and pricing methodology. For FEMA compliance, service fee remittances may require documentation with the authorised dealer bank.

Withholding Procedure for Indian Payers

The withholding compliance process for FTS payments to Chinese service providers under Section 195 of the Income Tax Act:

Step 1: Classify the Payment

Determine whether the payment constitutes FTS (managerial, technical, or consultancy services), royalties (use of IP), or business profits (general commercial services). The classification directly affects the applicable rate and article. Payments for routine procurement support, quality inspections, or market research may raise classification disputes.

Step 2: Verify Treaty Eligibility

Confirm the Chinese service provider's tax residency through the TRC, verify beneficial ownership, and ensure no PE connection exists. If the Chinese entity sends personnel to India who stay beyond the PE threshold (generally 183 days or more in a 12-month period), a service PE may be created, negating the FTS rate.

Step 3: Deduct TDS at the Treaty Rate

Deduct TDS at 10% of the gross FTS amount. No surcharge or cess applies at the treaty rate. If documentation is incomplete, apply the full domestic rate of 20% plus surcharge and cess (~20.8% to 21.84%).

Step 4: File Form 15CA/15CB

For remittances exceeding INR 5 lakh, file Form 15CA online after uploading the CA's certificate in Form 15CB. The CA must reference Article 12(2) and the 10% rate. For comprehensive compliance support, see our FEMA-RBI compliance services.

Step 5: Deposit TDS and File Returns

Deposit TDS by the 7th of the following month (30 April for March payments). File quarterly TDS returns in Form 27Q. Maintain all documentation — TRC, Form 10F, self-declarations, service agreements, and payment proofs — for a minimum of six years.

Common Disputes and Judicial Precedents

FTS taxation under India-China DTAA has generated significant litigation:

FTS vs Business Profits — The Classification Challenge

A recurring dispute concerns whether payments for services truly constitute FTS or should be classified as business profits under Article 7. If a Chinese entity provides services without any managerial, technical, or consultancy element — such as pure operational support, data processing, or routine administrative functions — the payment may not qualify as FTS. If classified as business profits and the Chinese entity has no PE in India, the payment is not taxable in India at all, resulting in zero withholding.

No "Make Available" Requirement

The India-China DTAA does not include a "make available" clause for FTS. This contrasts sharply with DTAAs like India-USA and India-UK, where FTS is taxable only if the services "make available" technical knowledge that enables the recipient to independently apply the technology. Under the India-China DTAA, any payment for managerial, technical, or consultancy services qualifies as FTS — a broader scope that benefits the source state's taxing rights.

Service PE and FTS Interaction

When Chinese personnel provide technical services in India, the duration and nature of their presence may trigger a service PE under Article 5(2)(l). If the Chinese entity's employees or personnel are present in India for more than 183 days in any 12-month period (the service PE threshold), a PE is created. In that scenario, Article 12 does not apply, and the FTS is taxed as business profits under Article 7 at net-basis corporate rates.

Transfer Pricing on Service Fees

Service fees between associated enterprises (such as an Indian subsidiary and its Chinese parent) are subject to transfer pricing scrutiny under Section 92. The Transfer Pricing Officer may apply the comparable uncontrolled price (CUP) method or the transactional net margin method (TNMM) to benchmark the service fee. Adjustments by the TPO increase the taxable amount and corresponding TDS obligation.

Reimbursement of Expenses vs FTS

Disputes frequently arise over whether reimbursements of out-of-pocket expenses by an Indian payer to a Chinese service provider constitute FTS. The ITAT has held in various cases that pure cost reimbursements without any markup or profit element do not constitute FTS, provided the Indian payer can demonstrate that the amounts represent actual expenses incurred by the Chinese entity on behalf of the Indian payer. Proper documentation of expense reimbursement — with supporting invoices and evidence — is critical.

Practical Examples and Calculations

Example 1: Chinese Engineering Consultancy Providing Technical Services

A Chinese engineering firm provides technical consultancy services to an Indian infrastructure company for a metro project. Annual service fee: USD 800,000 (approximately INR 6,72,00,000 at INR 84/USD).

• Without DTAA: TDS at 20% + surcharge (2%) + cess (4%) = ~20.8% = INR 1,39,77,600 withheld
• With DTAA (Article 12(2)): TDS at 10% = INR 67,20,000 withheld
• Tax saving: INR 72,57,600 per year

Example 2: Chinese Management Consultancy to Indian Subsidiary

A Chinese parent company provides management and strategic advisory services to its Indian subsidiary. Quarterly service fee: INR 1,50,00,000 (annual: INR 6,00,00,000).

• Without DTAA: TDS at ~20.8% = INR 1,24,80,000 withheld annually
• With DTAA (Article 12(2)): TDS at 10% = INR 60,00,000 withheld annually
• Tax saving: INR 64,80,000 per year

Note: Since this is an inter-company arrangement, the service fee must be at arm's length under transfer pricing rules. A contemporaneous transfer pricing study documenting the arm's length nature of the fee is essential.

Example 3: Service PE Scenario

A Chinese IT company sends 10 engineers to India for a software implementation project. The engineers are present in India for 200 days over a 12-month period. Since the 183-day service PE threshold is exceeded, a PE is created. The FTS is no longer taxable at 10% under Article 12 — instead, the profits attributable to the PE are taxed as business profits under Article 7 at regular corporate rates, with the ability to deduct expenses against revenue.

Frequently Asked Questions

What is the FTS tax rate under the India-China DTAA?

Under Article 12(2) of the India-China DTAA, the maximum withholding tax rate on fees for technical services is 10% of the gross amount when the beneficial owner is a resident of the other Contracting State. This compares favourably with India's current domestic rate of 20% plus surcharge and cess (~20.8% to 21.84%).

What types of services qualify as FTS?

The India-China DTAA defines FTS broadly as payments for managerial, technical, or consultancy services, including the provision of services of technical or other personnel. There is no "make available" requirement — any payment for these categories qualifies as FTS regardless of whether technical knowledge is transferred to the recipient.

Is there a make available test for FTS under this treaty?

No. Unlike DTAAs with the USA and UK, the India-China DTAA does not include a "make available" clause for FTS. This gives the source state (India) broader taxing rights — all managerial, technical, and consultancy service payments to Chinese entities are potentially taxable as FTS.

What documentation is required to claim the 10% rate?

The Chinese service provider must provide: (1) a valid Tax Residency Certificate from China's State Taxation Administration, (2) Form 10F self-declaration, and (3) a beneficial ownership and no-PE declaration. The Indian payer must file Form 15CA/15CB for remittances exceeding INR 5 lakh.

When does a service PE get triggered?

A service PE is triggered when the Chinese entity's employees or personnel are present in India for more than 183 days in any 12-month period providing the services. Once a PE is created, Article 12 no longer applies, and the income is taxed as business profits under Article 7.

Are expense reimbursements subject to TDS as FTS?

Pure cost reimbursements without any markup or profit element generally do not constitute FTS, provided the Indian payer can demonstrate they represent actual third-party expenses incurred by the Chinese entity. Proper documentation with supporting invoices is critical to avoid reclassification.

How does the Finance Act 2023 impact FTS taxation?

The Finance Act 2023 doubled the domestic FTS withholding rate from 10% to 20% under Section 115A, effective 1 April 2023. The 10% DTAA rate now delivers savings exceeding 10.8% compared to the domestic rate, making treaty benefit claims essential for Chinese service providers.