Withholding Tax Rates: India to South Africa Under DTAA

India to South Africa Withholding Tax Rates Under DTAA

When an Indian entity makes cross-border payments to a South African 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-South Africa DTAA, signed on 4 December 1996 and effective from 28 November 1997, provides a uniform reduced rate of 10% across all major income categories — significantly lower than India's domestic rate of 20%.

Both India and South Africa have ratified the OECD Multilateral Instrument (MLI). India deposited its instrument of ratification on 25 June 2019 (effective 1 October 2019), and South Africa did so on 30 September 2022 (effective 1 January 2023). The MLI introduces anti-abuse provisions including the Principal Purpose Test (PPT), which now applies to the India-South Africa treaty. For a complete treaty overview, see our India-South Africa DTAA complete guide.

Dividend Withholding Rates

Under Article 10 of the India-South Africa DTAA, dividends paid by an Indian company to a South African resident are subject to the following withholding rate:

Key points: Unlike many Indian DTAAs that differentiate between portfolio and substantial shareholders, the India-South Africa treaty applies a flat 10% rate on all dividends. This represents a saving of 10 percentage points compared to the domestic rate of 20% under Section 195. Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are now taxable in the hands of the recipient, making the treaty rate directly relevant for all South African shareholders receiving dividends from Indian companies.

The 10% rate is among the most favorable in India's DTAA network and applies without distinction to corporate or individual shareholders, provided they are the beneficial owners of the dividend income.

Interest Withholding Rates

Article 11 of the treaty provides two tiers for interest payments:

The interest provisions offer substantial savings for South African lenders providing capital to Indian entities. A South African bank or financial institution lending to an Indian company pays only 10% withholding tax instead of the domestic 20%, translating to significant cost reductions on external commercial borrowings. Under Article 11(3), interest is fully exempt from withholding tax when it is derived and beneficially owned by the Government, a political subdivision, or a local authority of the other contracting state, by the Reserve Bank of India or the South African Reserve Bank, or by a wholly government-owned agency approved in writing by the competent authorities — the exemption turns on who receives the interest, not on who pays it.

Interest is deemed to arise in India if the payer is the Government of India, a political subdivision, a local authority, or an Indian resident. Where the underlying debt is connected with a permanent establishment in India and the interest is borne by that PE, the interest is deemed to arise in India regardless of the payer's residence.

Royalty and FTS Withholding Rates

Article 12 of the India-South Africa DTAA covers both royalties and fees for technical services under a single provision, applying a uniform 10% rate:

Important distinction from the India-USA DTAA: Unlike the India-USA treaty which contains the restrictive "make available" clause, the India-South Africa treaty covers all services of a managerial, technical, or consultancy nature — not just those that transfer usable technical knowledge to the recipient. This means routine management fees, IT support services, consulting engagements, and advisory services all attract the 10% treaty rate when paid to South African residents, regardless of whether technical know-how is "made available" to the Indian payer.

The royalty definition is broadly drawn to include payments for the use of or right to use any copyright, patent, trademark, design, model, plan, secret formula, process, or for the use of or right to use industrial, commercial, or scientific equipment. This coverage is comprehensive and reduces the classification disputes that arise under some of India's other treaties.

Beacon Filing's tax advisory team can help structure your royalty and technical service arrangements to maximize DTAA benefits.

Capital Gains Treatment

Article 13 of the India-South Africa DTAA addresses capital gains with several distinct provisions:

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

Shares deriving value from immovable property: Gains from the sale of shares of a company whose assets consist principally of immovable property situated in India may be taxed in India — the treaty does not define "principally", but it is generally understood to mean more than half of the company's asset value. This anti-avoidance provision prevents indirect transfers of real estate through share sales.

PE-related assets: Gains from the alienation of movable property forming part of the business property of a permanent establishment are taxable in the state where the PE is situated, including on the alienation of the PE itself.

Other shares: Under Article 13(5), gains from the sale of shares in a company resident in the other contracting state — even one that is not property-rich — may also be taxed in that state. A South African shareholder selling shares of an Indian company can therefore be taxed in India on the resulting gains, a notable departure from the residence-only rule found in many of India's other treaties.

Other property: Gains from the alienation of property not covered by the preceding paragraphs are taxable only in the state where the alienator is a resident.

How to Apply Reduced Rates

To apply the reduced 10% DTAA rates instead of the domestic 20%, both the South African recipient and the Indian payer must comply with specific procedural requirements:

For the South African Recipient

1. Obtain a Tax Residency Certificate (TRC) — The South African resident must obtain a TRC from the South African Revenue Service (SARS) certifying their tax residency for the relevant fiscal year
2. File Form 10F electronically — Since 1 October 2023, Form 10F must be filed on the Indian Income Tax e-filing portal (non-residents without a PAN can register through a dedicated portal category) with prescribed details including name, status, nationality, tax identification number, and period of residential status; share the filed acknowledgment with the Indian payer
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 the reduced rate
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. Use Section 195(2) where a lower deduction is warranted — the Indian payer's own route is an application under Section 195(2) asking the Assessing Officer to determine the proportion of the remittance chargeable to tax; the Section 197 lower or nil withholding certificate is applied for by the South African payee, not by the payer

Domestic Rates vs Treaty Rates Comparison

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

Important note on surcharge and cess: Under domestic law, the withholding rate is further increased by applicable surcharge 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-South Africa DTAA stands out for its simplicity — a flat 10% rate across all categories with no complex sub-categorizations. This makes compliance straightforward compared to treaties with multiple rate tiers.

Common Mistakes and Compliance Tips

Mistake 1: Not Obtaining TRC Before Remittance

Many Indian payers apply treaty rates without collecting the Tax Residency Certificate from SARS first. The Income Tax Department can disallow the treaty benefit and demand tax at the domestic rate of 20% plus interest if the TRC is not on record at the time of payment.

Mistake 2: Ignoring MLI Impact on Treaty Benefits

Since both countries have ratified the MLI, the Principal Purpose Test (PPT) now applies. If the arrangement's principal purpose is to obtain treaty benefits, those benefits may be denied. South African entities routing transactions through shell structures solely for DTAA access should be aware of this anti-avoidance provision.

Mistake 3: Misclassifying FTS as Business Income

Some payers incorrectly treat technical service fees as business income (not taxable without a PE) rather than applying the 10% FTS rate under Article 12. The India-South Africa treaty's broad definition of FTS — covering all managerial, technical, and consultancy services — means most service payments to South African residents will attract the 10% rate.

Mistake 4: Forgetting Form 15CA/15CB Requirements

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

Mistake 5: Not Claiming Foreign Tax Credit

South African residents who have had Indian tax withheld must claim the foreign tax credit on their South African return under Section 6quat of the South African Income Tax Act to avoid actual double taxation.

For end-to-end compliance support on cross-border payments between India and South Africa, contact Beacon Filing's team of chartered accountants and tax advisors.

Frequently Asked Questions

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

The DTAA rate on dividends is a flat 10%, applicable to all South African residents regardless of the percentage of shareholding. This compares favorably to the domestic rate of 20%, saving 10 percentage points on every dividend payment.

Does the MLI affect the India-South Africa DTAA?

Yes. Both India and South Africa have ratified the MLI. The Principal Purpose Test (PPT) now applies, meaning treaty benefits may be denied if the principal purpose of an arrangement is to obtain those benefits. Other MLI provisions such as modified PE rules may also apply depending on each country's reservations.

Are fees for technical services taxable under the India-South Africa DTAA?

Yes. Article 12 covers fees for services of a managerial, technical, or consultancy nature at a rate of 10%. Unlike the India-USA treaty, there is no "make available" requirement — all such service payments are covered regardless of whether technical knowledge is transferred.

How do South African banks benefit from the India-South Africa DTAA?

South African banks and financial institutions lending to Indian entities benefit from a reduced withholding rate of 10% on interest (compared to the domestic rate of 20%). Interest derived by the Reserve Bank of India or the South African Reserve Bank is fully exempt under Article 11(3).

Can I apply for a nil withholding certificate under the India-South Africa DTAA?

Yes. Under Section 197 of the Income Tax Act, the payee — the South African recipient — applies to the Assessing Officer for a certificate authorizing lower or nil withholding if the actual tax liability is expected to be nil or lower than the standard withholding rate. The Indian payer cannot apply under Section 197; the payer's route is an application under Section 195(2).

What documentation is required to claim DTAA benefits in India?

The South African resident must provide a Tax Residency Certificate (TRC) from SARS, Form 10F, and a self-declaration of beneficial ownership and non-PE status. The Indian payer must file Form 15CA (and Form 15CB for payments exceeding INR 5 lakh) before making the remittance.