India-Indonesia DTAA: Complete Guide to the Double Taxation Treaty

Quick answer: The India-Indonesia DTAA, signed 27 July 2012 and effective from 5 February 2016, sets a uniform 10% withholding tax rate on dividends, interest, royalties, and fees for technical services — well below India's 20% domestic rate. Interest paid to the Government of Indonesia or Bank Indonesia is exempt at 0%. Both countries have ratified the Multilateral Instrument (MLI), making this treaty a Covered Tax Agreement.

Key takeaways:

• Dividends, interest, royalties and FTS all capped at a uniform 10% rate.
• Interest paid to the Government of Indonesia or Bank Indonesia taxed at 0%.
• Domestic withholding tax rate is 20% without treaty benefits.
• Treaty entered into force 5 February 2016, based on a hybrid OECD/UN model.
• MLI applies; India ratified in 2019, Indonesia in 2020.

Overview of the India-Indonesia DTAA

The Double Taxation Avoidance Agreement (DTAA) between India and Indonesia is a significant bilateral tax treaty governing cross-border taxation between two of Asia's largest economies. The agreement was signed on 27 July 2012 in New Delhi and entered into force on 5 February 2016. It is based on a hybrid of the OECD and UN Model Tax Conventions, reflecting both countries' status as major developing economies with substantial mutual investment interests.

India and Indonesia are the two largest economies in their respective regions, with a combined GDP exceeding USD 5 trillion. Bilateral trade has grown substantially, reaching over USD 38 billion in recent years, driven by commodities (palm oil, coal, crude oil), manufacturing, IT services, and pharmaceuticals. The DTAA provides the tax framework necessary for this expanding commercial relationship, reducing withholding tax burdens and clarifying taxing rights.

Like the India-Thailand DTAA, the India-Indonesia treaty features a uniform 10% withholding rate on dividends, interest, and royalties — and it goes further by capping fees for technical services at the same 10%, a category the Thailand treaty does not separately cover. This consistency simplifies compliance for businesses operating across both jurisdictions. Beacon Filing's tax advisory services help businesses navigate the treaty and structure cross-border transactions efficiently.

Treaty History and Current Status

India and Indonesia had an earlier tax treaty that governed bilateral tax relations for several decades. As economic ties deepened — particularly with Indonesian investment in Indian infrastructure and Indian IT and pharmaceutical companies expanding into Southeast Asia — the need for a modernized agreement became pressing. The new DTAA was signed on 27 July 2012 during a bilateral summit and entered into force on 5 February 2016 after the completion of ratification procedures by both countries.

The 2012 agreement introduced modern provisions aligned with international standards, including comprehensive articles on fees for technical services, updated permanent establishment definitions, enhanced exchange of information provisions, and assistance in collection of taxes. The treaty's effective date of 5 February 2016 meant it became applicable for Indian withholding tax purposes from the assessment year 2017-18 onwards.

Both India and Indonesia have signed and ratified the OECD Multilateral Instrument (MLI). India signed the MLI on 7 June 2017 and ratified it on 25 June 2019, with the MLI entering into force for India on 1 October 2019. Indonesia signed the MLI on 7 June 2017 and deposited its instrument of ratification, with the MLI entering into force for Indonesia on 1 August 2020. The India-Indonesia DTAA is listed as a Covered Tax Agreement, meaning MLI modifications including the Principal Purpose Test (PPT) under Article 7 of the MLI now apply. This adds anti-abuse provisions to prevent treaty shopping and ensures that treaty benefits are available only for arrangements with genuine economic substance.

Key Treaty Articles

The India-Indonesia DTAA contains comprehensive provisions covering all major cross-border income categories. Below are the articles most relevant to businesses and investors.

Article 5 — Permanent Establishment

Article 5 defines when an Indonesian enterprise creates a permanent establishment (PE) in India. The definition includes a fixed place of business such as a place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, or any place of extraction of natural resources. A building site, or a construction, installation, or assembly project, constitutes a PE if it lasts for more than 183 days within any 12-month period. The services PE provision is particularly important: an enterprise is deemed to have a PE if it furnishes services through employees or other personnel in India for a period aggregating more than 91 days within any 12-month period for the same or a connected project.

Article 7 — Business Profits

Business profits of an Indonesian enterprise are taxable in India only if the enterprise carries on business through a PE in India. Profits attributable to the PE are determined on an arm's-length basis, treating the PE as a distinct and separate enterprise.

Article 10 — Dividends

Dividends paid by an Indian company to an Indonesian resident beneficial owner may be taxed in India at a rate not exceeding 10% of the gross amount. India's domestic withholding rate on dividends paid to non-residents is 20% under Section 195, so the treaty provides a 50% reduction. There is no tiered structure based on shareholding percentage — the flat 10% rate applies to all dividend payments.

Article 11 — Interest

Interest arising in India and paid to an Indonesian resident may be taxed at a maximum of 10% of the gross amount. Interest paid to the Government of Indonesia, Bank Indonesia (the central bank), or any institution wholly owned by the Government is exempt from Indian tax. This provides significant savings for Indonesian government-linked entities providing financing to Indian projects.

Article 12 — Royalties and Fees for Technical Services

Royalties and fees for technical services arising in India and paid to an Indonesian resident may be taxed at a rate not exceeding 10% of the gross amount. Royalties include payments for copyrights, patents, trademarks, designs, models, plans, secret formulas, or processes. FTS includes payments for managerial, technical, or consultancy services. Like the India-Malaysia DTAA, there is no "make available" clause — all types of technical services are covered regardless of knowledge transfer.

Article 13 — Capital Gains

Capital gains from immovable property are taxable where the property is situated. Gains from shares of companies deriving more than 50% of their value from immovable property in a contracting state may also be taxed in that state. For other shares, each contracting state may tax gains in accordance with its domestic law. The treaty provides for a foreign tax credit mechanism to eliminate double taxation on capital gains.

Withholding Tax Rates Summary

The India-Indonesia DTAA applies a uniform 10% withholding rate across all major income categories:

The uniform 10% rate halves the domestic withholding rate across the board, providing consistent and predictable savings. Under Section 90(2) of the Income Tax Act, a taxpayer may apply whichever rate is more beneficial — with all treaty rates below domestic rates, the treaty always provides an advantage for Indonesian recipients.

Permanent Establishment Rules

The PE provisions in the India-Indonesia DTAA are comprehensive and reflect the economic realities of both countries' cross-border activities. Article 5 establishes several categories:

Fixed Place PE: A place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, or any place of extraction of natural resources. Standard exclusions apply for activities of a preparatory or auxiliary nature — storage, display, purchasing, and information gathering do not create a PE.

Construction PE: A building site, or a construction, installation, or assembly project (including supervisory activities), constitutes a PE if it continues for more than 183 days within any 12-month period. This threshold is particularly relevant for Indonesian infrastructure and construction companies undertaking projects in India.

Services PE: An enterprise is deemed to have a PE if it furnishes services, including consultancy services, through employees or other personnel in India for a period aggregating more than 91 days within any 12-month period for the same or a connected project. This 91-day threshold is relatively short, making it critical for Indonesian service companies to carefully monitor employee deployment durations in India.

Agency PE: A person acting on behalf of an Indonesian enterprise who habitually exercises authority to conclude contracts in the enterprise's name creates a PE. However, independent agents acting in the ordinary course of their business do not constitute a PE, provided they are not acting exclusively or almost exclusively for the enterprise.

With the MLI applicable, the PE definition may be modified by anti-fragmentation provisions and commissionnaire arrangement rules. Indonesian companies should obtain professional PE risk assessments, which Beacon Filing's India entry strategy team provides.

Tax Residency and Certificate Requirements

Under Article 4, a resident of a contracting state means any person liable to tax by reason of domicile, residence, place of management, place of incorporation, or any similar criterion. In India, tax residency is determined primarily by the 182-day presence test under Section 6 of the Income Tax Act. In Indonesia, tax residency is based on domicile, extended presence (more than 183 days in 12 months), or habitual residence within a tax year.

For dual residents (individuals), the tie-breaker rules apply sequentially: permanent home, center of vital interests, habitual abode, and nationality. For dual-resident entities, the place of effective management determines residency.

To claim reduced treaty rates in India, an Indonesian resident must provide a Tax Residency Certificate (TRC) — known in Indonesia as a Certificate of Domicile (COD) or Surat Keterangan Domisili — issued by the Directorate General of Taxes (Direktorat Jenderal Pajak, or DJP). The COD must be in the format prescribed by Indonesian regulations or in a form acceptable to the Indian tax authorities. Additionally, Form 10F must be filed electronically on the Indian Income Tax portal.

Mutual Agreement Procedure

The India-Indonesia DTAA provides for a Mutual Agreement Procedure (MAP) where a resident believes that actions of one or both contracting states result in taxation not in accordance with the treaty. The resident may present the case to the competent authority of the state of residence within three years from the first notification of the action.

The competent authorities shall endeavor to resolve the case by mutual agreement and may communicate directly. India's competent authority is the Central Board of Direct Taxes (CBDT), and Indonesia's competent authority is the Directorate General of Taxes (DJP). This procedure is particularly important for transfer pricing disputes between associated enterprises in India and Indonesia, especially in sectors like commodities, IT services, and manufacturing where intercompany transactions are substantial.

How to Claim Treaty Benefits

Claiming benefits under the India-Indonesia DTAA requires the following compliance steps:

Step 1: Obtain a Certificate of Domicile (COD)

The Indonesian resident must obtain a Certificate of Domicile (Surat Keterangan Domisili) from the Directorate General of Taxes (DJP) in Indonesia. This certificate must confirm that the person is a tax resident of Indonesia for the relevant period. The COD can be in the form prescribed by DJP regulations or in the form of the treaty partner country.

Step 2: Provide Form 10F

Furnish Form 10F to the Indian payer containing prescribed details — name, status, nationality, Indonesian NPWP (Tax Identification Number), period of residential status, and nature of income. Form 10F can be filed electronically on the Indian Income Tax portal.

Step 3: Self-Declaration

A self-declaration confirming beneficial ownership, absence of PE in India (if relevant), and that the arrangement has a genuine business purpose. Given the MLI's Principal Purpose Test, this declaration should address the economic substance of the arrangement.

Step 4: Indian Payer Compliance under Section 195

The Indian payer must deduct TDS at 10% (the treaty rate) and file Form 15CA electronically before making the remittance. For payments exceeding INR 5 lakh, a Chartered Accountant's certificate in Form 15CB is required. Quarterly TDS returns must reflect the treaty rate applied.

Step 5: Claim Relief under Section 90

Indian residents earning income in Indonesia can claim double taxation relief under Section 90 by way of a foreign tax credit for Indonesian taxes paid, subject to Rule 128 provisions.

Beacon Filing's FEMA and RBI compliance services ensure complete documentation for treaty benefit claims.

Frequently Asked Questions

What is the India-Indonesia DTAA and when was it signed?

The India-Indonesia DTAA is a bilateral tax treaty signed on 27 July 2012 between the Government of India and the Government of the Republic of Indonesia. It entered into force on 5 February 2016 and aims to eliminate double taxation on cross-border income and prevent fiscal evasion between the two countries.

What are the withholding rates under the India-Indonesia DTAA?

The treaty applies a uniform 10% withholding rate across all major income categories — dividends, interest, royalties, and fees for technical services. This represents a 50% reduction from India's domestic rate of 20%. Interest paid to the Indonesian Government or Bank Indonesia is fully exempt.

Does the MLI apply to the India-Indonesia DTAA?

Yes. Both India and Indonesia have signed and ratified the OECD Multilateral Instrument (MLI), and the India-Indonesia DTAA is listed as a Covered Tax Agreement. The Principal Purpose Test (PPT) and certain PE-related modifications now apply, adding anti-abuse provisions to the treaty.

What is the services PE threshold under this treaty?

Under Article 5, an Indonesian enterprise creates a services PE in India if it furnishes services through employees or other personnel for the same or connected project for a period aggregating more than 91 days within any 12-month period. This is a relatively short threshold compared to the 183-day threshold in the India-Thailand DTAA.

What documentation is needed to claim DTAA benefits in India?

Indonesian residents need a Certificate of Domicile (Surat Keterangan Domisili) from the Directorate General of Taxes (DJP) in Indonesia, Form 10F filed on the Indian Income Tax portal, and a self-declaration of beneficial ownership. The Indian payer must file Form 15CA (and Form 15CB for payments exceeding INR 5 lakh).

Is there a "make available" clause in the India-Indonesia DTAA?

No. The India-Indonesia treaty does not contain a "make available" clause. All managerial, technical, and consultancy services provided by Indonesian residents to Indian entities are covered as FTS at 10%, regardless of whether technical knowledge is transferred to the recipient.

How are capital gains from Indian investments taxed for Indonesian residents?

Capital gains from immovable property in India are taxable at Indian domestic rates. Gains from shares of immovable property-rich companies may also be taxed in India. For other shares, India may tax gains under domestic law. Indonesian residents can claim a foreign tax credit in Indonesia for taxes paid in India to avoid double taxation.