Withholding Tax Rates: India to Indonesia Under DTAA

India to Indonesia Withholding Tax Rates Under DTAA

When an Indian entity makes payments to an Indonesian resident — whether dividends, interest, royalties, or fees for technical services — withholding tax must be deducted at source under Section 195 of the Income Tax Act, 1961. The India-Indonesia DTAA, signed on 27 July 2012 in New Delhi, in force from 5 February 2016, and effective in India for fiscal years beginning on or after 1 April 2017, provides a uniform reduced rate of 10% on most payment types compared to India's domestic rate of 20%. Under Section 90(2), taxpayers can apply whichever rate is more beneficial — the treaty rate or the domestic rate — meaning the effective rate is always the lower of the two.

The India-Indonesia DTAA replaced an earlier agreement from 1987 and broadly follows the OECD Model Tax Convention, with UN Model features such as source-state taxation of fees for technical services and a service PE clause. Both India and Indonesia have signed and ratified the OECD Multilateral Instrument (MLI), which modifies certain treaty provisions including anti-abuse rules and permanent establishment definitions. For the full treaty analysis, see our India-Indonesia DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-Indonesia DTAA, dividends paid by an Indian company to an Indonesian resident are subject to the following withholding rates:

Key points: The India-Indonesia DTAA provides a single flat 10% rate on dividends, regardless of the shareholding percentage. This is more straightforward than many other Indian DTAAs (such as the India-USA DTAA) which use tiered rates based on shareholding thresholds. Since India's domestic withholding rate on dividends paid to non-residents is 20% (plus applicable surcharge and cess), the treaty rate provides a significant 10 percentage point saving.

The dividend provisions do not apply if the beneficial owner carries on business in India through a permanent establishment to which the shareholding generating the dividends is effectively connected. In such cases, the dividends are taxed as business profits under Article 7.

Interest Withholding Rates

Article 11 of the treaty provides tiered interest rates depending on the nature of the recipient:

The interest provisions offer substantial savings for Indonesian lenders. The general rate of 10% represents a 50% reduction compared to India's domestic withholding rate of 20%. For government institutions and specified entities — including Bank Indonesia, Pusat Investasi Pemerintah, and Lembaga Pembiayaan Ekspor Indonesia on the Indonesian side, and the Reserve Bank of India, EXIM Bank of India, and National Housing Bank on the Indian side — interest payments are fully exempt from withholding tax.

This exemption is particularly valuable for sovereign lending and government-backed external commercial borrowings. The interest must arise in the source state and be paid to a beneficial owner who is a resident of the other contracting state.

Royalty and FTS Withholding Rates

Article 12 of the India-Indonesia DTAA covers both royalties and fees for technical services under a combined provision:

Unlike the India-USA treaty which has a "make available" clause, the India-Indonesia DTAA taxes all fees for technical, managerial, or consultancy services at the flat 10% rate, regardless of whether the services transfer technical knowledge to the recipient. This is a broader definition of taxable services — any technical or consultancy service payment from India to an Indonesian recipient triggers the 10% withholding requirement.

The definition of royalties under Article 12(3) includes payments 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, trade mark, design or model, plan, secret formula or process, for the use of or the right to use industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.

Capital Gains Treatment

Article 13 of the India-Indonesia DTAA addresses capital gains with the following provisions:

Immovable property: Gains from the alienation of immovable property situated in India are taxable in India under domestic rates — 12.5% for long-term capital gains (held over 24 months) and normal applicable rates for short-term gains (slab rates for individuals, the applicable corporate rate for companies).

Shares deriving value from immovable property: Gains from alienation of shares deriving more than 50% of their value from immovable property situated in a contracting state may be taxed in that state. This is an anti-avoidance measure preventing indirect transfers of real estate.

Other shares: Under Article 13(5), gains from the alienation of shares other than property-rich shares in a company resident in a contracting state may be taxed in that state — so gains on shares of an Indian company are generally taxable in India.

Business assets: Gains from alienation of movable property forming part of the business property of a permanent establishment are taxable in the state where the PE is situated.

Ships and aircraft: Under Article 13(3), gains derived by an enterprise from the alienation of ships or aircraft operated in international traffic, or of movable property pertaining to their operation, are taxable only in the contracting state in which the enterprise's place of effective management is situated.

Indonesian residents disposing of Indian assets should claim a foreign tax credit in Indonesia to avoid double taxation on capital gains. It is advisable to consult with a qualified tax professional to determine the most tax-efficient approach for specific transactions.

How to Apply Reduced Rates

To apply the reduced DTAA rates instead of domestic rates, both the Indonesian recipient and the Indian payer must follow specific procedures:

For the Indonesian Recipient

1. Obtain a Tax Residency Certificate (TRC) — The Indonesian resident must obtain a TRC from the Directorate General of Taxes (DJP) certifying Indonesian tax residency for the relevant fiscal year
2. Complete Form 10F — Furnish Form 10F to the Indian payer with prescribed details including name, status, nationality, tax identification number (NPWP), and period of residential status
3. Self-declaration — Provide a declaration confirming beneficial ownership of the income and absence of a PE in India (if applicable)

For the Indian Payer

1. Verify documentation — Ensure TRC, Form 10F, and self-declaration are on file before applying reduced rates
2. File Form 15CA online — Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB
4. Apply for lower withholding certificate — Under Section 197, the Indonesian payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding; an Indian payer seeking a determination of the taxable portion of the remittance applies separately under Section 195(2)

Beacon Filing's tax advisory team handles the complete documentation process for claiming DTAA benefits on cross-border payments to Indonesia.

Domestic Rates vs Treaty Rates Comparison

India's domestic withholding tax rates for non-residents (without surcharge and cess) compared against the India-Indonesia DTAA rates:

Important note on surcharge and cess: Under domestic law, the withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate, making the effective savings even greater than the headline comparison suggests.

The India-Indonesia DTAA offers one of the most consistent and favourable rate structures among India's DTAAs, with a uniform 10% cap across all passive income categories. For businesses considering market entry, see our guide on registering a company in India from Indonesia.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many payers apply treaty rates without collecting the Tax Residency Certificate first. The Income Tax Department can disallow the treaty benefit and demand tax at domestic rates plus interest under Section 201(1A) if the TRC is not on record at the time of payment.

Mistake 2: Confusing the 1987 Treaty with the 2012 Treaty

The current India-Indonesia DTAA was signed on 27 July 2012, replacing the earlier 1987 agreement. Some practitioners still reference obsolete rate schedules from the old treaty. Always ensure you are applying rates from the treaty that entered into force on 5 February 2016.

Mistake 3: Ignoring the Branch Profit Tax Cap

Paragraph 4 of the Protocol to the India-Indonesia DTAA caps any additional or branch profits tax on a permanent establishment's profits at 15%. India does not currently levy a separate branch profits tax — an Indian branch of an Indonesian company simply pays tax at the 35% foreign-company rate — so in practice this cap is chiefly relevant for Indian companies operating branches in Indonesia, where a domestic branch profits tax of 20% otherwise applies.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (up to INR 1 lakh). The form must be filed electronically before the bank processes the outward remittance.

Mistake 5: Not Considering MLI Impact

Both India and Indonesia have ratified the MLI, which introduces the Principal Purpose Test (PPT) and modified PE rules. Treaty benefits may be denied if the principal purpose of an arrangement is to obtain treaty benefits. Ensure that cross-border structures have genuine commercial substance beyond tax savings.

For end-to-end compliance support on cross-border payments between India and Indonesia, contact Beacon Filing's FEMA and RBI compliance team.

Frequently Asked Questions

What is the withholding tax rate on dividends paid from India to Indonesia?

The DTAA rate on dividends paid from India to an Indonesian resident is 10% of the gross amount, regardless of the shareholding percentage. This is significantly lower than the domestic withholding rate of 20% and provides a uniform 10 percentage point saving.

Are interest payments to Indonesian banks eligible for reduced rates?

Yes. General interest payments attract a 10% DTAA rate instead of the 20% domestic rate. Interest paid to Bank Indonesia and certain specified Indonesian government institutions is fully exempt from withholding tax under Article 11(3).

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

No. Unlike the India-USA DTAA, the India-Indonesia treaty does not include a 'make available' clause. All fees for technical, managerial, or consultancy services are taxable at 10% regardless of whether the services transfer technical knowledge to the recipient.

Which treaty applies — the 1987 agreement or the 2012 agreement?

The 2012 treaty, signed on 27 July 2012, entered into force on 5 February 2016 and took effect in India from 1 April 2017, replacing the 1987 agreement entirely. All withholding rates should be applied under the 2012 treaty.

How does the MLI affect the India-Indonesia DTAA?

Both India and Indonesia have ratified the MLI. The key modifications include the introduction of the Principal Purpose Test (PPT) which can deny treaty benefits for arrangements with a principal purpose of obtaining treaty benefits, and potential changes to permanent establishment definitions. For withholding taxes, the MLI's modifications apply to India-source payments from 1 April 2021 (India elected its April–March taxable period in place of the calendar year for this purpose) and to Indonesia-source payments from 1 January 2021.

What documentation is required to claim the 10% DTAA rate?

The Indonesian resident must provide a Tax Residency Certificate from the Indonesian Directorate General of Taxes, Form 10F, and a self-declaration of beneficial ownership. The Indian payer must file Form 15CA electronically and obtain Form 15CB for payments exceeding INR 5 lakh.