Royalty Tax Rate Between India and Indonesia Under DTAA

Quick answer: Article 12(2) of the India-Indonesia DTAA caps withholding tax on royalties at 10% of the gross amount, versus India's domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961). The definition in Article 12(3)(a) is broad — it covers copyrights, patents, trademarks and know-how, and explicitly includes the use of or right to use industrial, commercial or scientific equipment, so equipment rental payments to an Indonesian owner are royalties, not a separate category. The treaty is a Covered Tax Agreement, so the MLI Principal Purpose Test also applies alongside the beneficial-ownership requirement.

Key takeaways:

• Royalty rate capped at 10% under Article 12(2), versus 20% domestically (doubled by the Finance Act 2023)
• Definition includes equipment rental and industrial/commercial/scientific know-how, not just IP licences
• No 'make available' requirement — broader royalty/FTS scope than USA or UK treaties
• No MFN clause and no separate Limitation of Benefits article
• MLI Principal Purpose Test applies because the treaty is a Covered Tax Agreement

Royalty Tax Rate Between India and Indonesia

The India-Indonesia DTAA, signed 27 July 2012 and in force from 5 February 2016, sets the withholding tax framework for royalty payments between the two countries. Under Article 12(2), the maximum withholding tax India can charge on royalties paid to an Indonesian beneficial owner is 10% of the gross amount, compared to the domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) — a rate doubled from 10% by the Finance Act 2023.

Indonesian manufacturers licence patented processes to Indian joint-venture partners, Indonesian brand owners license trademarks for the Indian market, and Indian software and engineering firms licence technology into Indonesia. Article 12 combines royalties and fees for technical services into a single provision — a UN Model feature rather than a purely OECD one — reflecting both countries' interest in preserving source-state taxing rights over technology payments. This treaty replaced the 1987 India-Indonesia agreement and took effect for royalty withholding in India from fiscal years beginning on or after 1 April 2017. See our India-Indonesia DTAA complete guide for the treaty's other provisions.

For businesses structuring cross-border licensing arrangements, Beacon Filing's tax advisory services and transfer pricing team can help align royalty rates with arm's-length requirements and treaty documentation.

Treaty Rate vs Domestic Rate: Detailed Comparison

Domestic Rate (Without DTAA)

Under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025, royalties paid to a non-resident are taxed at 20% (plus surcharge and cess), a rate the Finance Act 2023 doubled from the earlier 10% with effect from 1 April 2023.

DTAA Rate (With Treaty)

Article 12(2) restricts India's taxing right to 10% of the gross royalty amount, provided the Indonesian recipient is the beneficial owner — a flat rate that applies regardless of whether the payment is for a patent licence, a trademark, software customisation, or equipment rental.

Effective Tax Savings

An Indonesian process-technology licensor receiving INR 1 crore in annual royalties from an Indian manufacturing joint venture saves INR 10 lakh a year under the treaty (INR 10 lakh TDS at 10% instead of INR 20 lakh at 20%) — a saving that has doubled in absolute terms since the Finance Act 2023 raised the domestic baseline.

Who Qualifies for the Reduced Rate

Beneficial Ownership Requirement

The Indonesian recipient must be the beneficial owner of the royalty — the genuine economic owner of the underlying right, not a licensing conduit holding IP on behalf of a third-country owner.

Tax Residency

The recipient must be a tax resident of Indonesia under Article 4 and must produce a Certificate of Domicile from the DJP under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Anti-Abuse: MLI Principal Purpose Test

Because India and Indonesia have both notified this treaty as a Covered Tax Agreement under the Multilateral Instrument, the Principal Purpose Test applies to royalty payments from 1 April 2021 (India-source) and 1 January 2021 (Indonesia-source). A royalty flow routed through an Indonesian licensing entity with no real function, mainly to access the 10% rate, can be denied treaty benefit under the PPT even if the entity technically holds legal title to the IP. The treaty has no separate Limitation of Benefits article and no MFN clause, so the PPT and India's domestic GAAR are the operative anti-abuse tools.

No PE Attribution

Under Article 12(4), if the Indonesian owner carries on business in India through a permanent establishment and the right generating the royalty is effectively connected with that PE, Article 12 does not apply — the royalty is taxed instead as business profits under Article 7, generally at the 35% foreign-company rate.

Royalty-Specific Treaty Provisions Under Article 12

Definition of Royalties (Article 12(3)(a))

The treaty defines royalties as payments of any kind for the use of, or right to use, any copyright of literary, artistic or scientific work — including cinematograph films, or films or tapes used for radio or television broadcasting — any patent, trademark, design or model, plan, secret formula or process, for the use of or right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. This is a broad definition covering IP licences, know-how payments, and equipment rental alike.

Article 12(1): Residence State Taxation

Royalties arising in one state and paid to a resident of the other may be taxed in that other (residence) state.

Article 12(2): Source State Cap

The source state's tax on the beneficial owner "shall not exceed 10% (ten per cent) of the gross amount of the royalties or fees for technical services" — a single cap shared with the FTS provision in the same article.

Article 12(4): PE Exception

Where the royalty is effectively connected with a permanent establishment of the beneficial owner in the source state, Article 7 (business profits) applies instead of Article 12.

Article 12(5): Source Rule

Royalties are deemed to arise in a Contracting State when the payer is that state, a political subdivision, local authority, or resident of that state; a further rule extends the source location to where the underlying right is used if the payer test does not allocate the royalty to either state.

Article 12(6): Arm's Length Rule

Where a special relationship between payer and recipient inflates the royalty above an arm's-length amount, only the arm's-length portion attracts the 10% cap — the excess is taxable under domestic law, engaging India's transfer pricing rules.

Documentation Required to Claim the Reduced Rate

Certificate of Domicile

A Certificate of Domicile from the DJP confirming Indonesian tax residency is the foundational requirement under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Where the Certificate of Domicile lacks prescribed details, Form 41 must be filed electronically, capturing the licensor's name, status, nationality, NPWP and residential period.

Self-Declaration and Licence Documentation

A self-declaration of beneficial ownership and no-PE status, plus the underlying licence agreement and evidence that the royalty rate is arm's length, should be retained — essential for related-party licensing subject to transfer pricing benchmarking.

Withholding Procedure for Indian Payers

Section 393(2): TDS Obligation

Under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), the Indian licensee must deduct TDS at 10% with valid documentation, or 20% without it, at the time of credit or payment.

Forms 145 and 146

Form 145 must be filed electronically before remittance; Form 146, certified by a Chartered Accountant, is additionally required for remittances exceeding INR 5 lakh, referencing Article 12 and the applicable rate.

Section 395(1): Lower Withholding Certificate

An Indonesian licensor can apply under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) for a certificate authorising a lower or nil withholding rate where the actual tax liability is lower than the standard deduction.

Compliance Notes and Common Issues

Software Characterisation

Whether a software payment is a royalty depends on its substance: the Supreme Court's ruling in Engineering Analysis Centre of Excellence held that payments for standard, shrink-wrapped software licences are not royalties because no copyright is transferred — a general principle of Indian tax law that applies equally under the India-Indonesia DTAA. Customised software or source-code access can still qualify as royalty income.

Equipment Rental — A Distinctive Feature

Because Article 12(3)(a) explicitly includes industrial, commercial or scientific equipment, cross-border equipment leasing from Indonesia — for instance, oilfield or construction machinery leased to an Indian project — is taxed as royalty at 10%, not under a separate business-income or rental framework.

No MFN Clause

The treaty and Protocol contain no most-favoured-nation clause, so royalty concessions in later Indian treaties with other countries do not flow through to the India-Indonesia DTAA.

Transfer Pricing on Related-Party Royalties

Indian transfer pricing officers routinely benchmark intra-group royalty rates against comparable uncontrolled transactions; a rate above the arm's-length benchmark loses the Article 12(6) protection for the excess and may also be disallowed as a deduction.

Practical Examples and Calculations

Example 1: Patent Licence for Manufacturing Technology

An Indonesian company licenses a patented plastics-moulding process to an Indian manufacturer for an annual royalty of INR 80 lakh.

• Without DTAA: TDS at 20% = INR 16 lakh; net receipt INR 64 lakh.
• With DTAA: TDS at 10% = INR 8 lakh; net receipt INR 72 lakh.
• Saving: INR 8 lakh per year.

Example 2: Equipment Rental

An Indonesian company leases specialised drilling equipment to an Indian energy company for INR 2 crore annually. Because Article 12(3)(a) treats equipment rental as royalty, the payment is taxed at 10% under Article 12(2) — TDS of INR 20 lakh — rather than as ordinary business income.

Example 3: Trademark Licence Above Arm's Length

An Indonesian brand owner charges its Indian subsidiary a 6% royalty on revenue (INR 6 crore) for using its trademark. The transfer pricing officer benchmarks the arm's-length rate at 3% (INR 3 crore). Under Article 12(6), the 10% treaty rate applies to the arm's-length INR 3 crore; the excess INR 3 crore is taxed under domestic law and disallowed as a deduction for the Indian subsidiary.

Frequently Asked Questions

What is the royalty tax rate under the India-Indonesia DTAA?

Under Article 12(2), royalties paid to an Indonesian beneficial owner are capped at 10% of the gross amount, compared to India's domestic rate of 20% under section 207(2) (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961), doubled by the Finance Act 2023.

Does the royalty definition cover equipment rental?

Yes. Article 12(3)(a) defines royalties to include payments for the use of, or the right to use, industrial, commercial or scientific equipment, alongside copyrights, patents, trademarks, designs, secret formulas and know-how. Equipment leasing and rental payments to an Indonesian owner therefore fall within the 10% royalty rate, not a separate category.

Does the India-Indonesia DTAA have a 'make available' clause?

No. Article 12 does not require that technical knowledge be 'made available' to the Indian payer for a payment to qualify as a royalty or FTS. This makes the definitions broader than treaties with the USA or UK, which condition FTS taxation on a transfer of know-how.

How does the MLI Principal Purpose Test affect royalty payments?

Because the India-Indonesia DTAA is a Covered Tax Agreement, the MLI's Principal Purpose Test can deny the 10% royalty rate to arrangements — such as routing IP through an Indonesian shell with no real function — set up mainly to access the reduced rate, in addition to India's domestic GAAR.

Is there an MFN clause that could reduce the royalty rate further?

No. Neither the treaty nor its Protocol contains a most-favoured-nation clause, so a lower royalty rate agreed in a subsequent Indian treaty with another country cannot be imported into the India-Indonesia DTAA. The 10% cap under Article 12(2) is the operative ceiling for both royalties and FTS.

What happens if a royalty payment is connected to a PE in India?

Under Article 12(4), if the Indonesian beneficial owner carries on business in India through a permanent establishment and the right or property generating the royalty is effectively connected with that PE, the 10% cap does not apply. The royalty is instead taxed as business profits under Article 7.