Eligible payments and credits
There have been amendments to the taxation of certain payments and credits made by Australian customers to Indian residents. The law amendment applies to income years commencing on or after 29 December 2022.
If you are a resident of India for tax purposes, you will not be subject to tax for certain payments or credits received from Australian customers. These are for technical services that you have provided remotely (not through a permanent establishment in Australia).
These payments or credits must be:
- for technical services covered by Article 12(3)(g) of the Double Tax Agreement between Australia and India (the Indian Agreement)
- not royalties within the meaning of the Income Tax Assessment Act 1936 (ITAA 1936)
- subject to tax in Australia, prior to the law amendment, because of the operation of Article 12(3)(g) and Article 23 of the Indian Agreement. (For example, payments in consideration for technical services not provided in Australia through a permanent establishment.)
If you provide both onshore and offshore technical services, refer to Composite contracts.
Composite contracts
A composite contract (also known as an onshore-offshore arrangement) exists where a taxpayer provides both:
- offshore services via a head office in India
- onshore services via a permanent establishment (PE) situated in Australia.
The law amendment will not impact Australia's taxation of payments or credits made by Australian customers for onshore technical services. These are provided in Australia through an Australian PE of the Indian resident.
Example: composite contract
Dhanno Services has an Indian head office and establishes offices in Australia. They comprise an Australian PE within the meaning of the Indian Agreement.
Dhanno Services provides information technology (IT) services to customers in Australia.
In performing IT services for its Australian customers, Dhanno Services provides:
- onshore services through its Australian PE by staff located in
- its Australian offices
- its Australian customers' premises
- offshore services from its Indian head office by staff remotely located in the Indian offices.
Certain payments made by Australian customers for the 'offshore' IT services are royalties within the meaning of Article 12(3)(g) of the Indian Agreement.
For income years commencing on or after 29 December 2022, the amendment means that Australia will:
- not tax certain payments made to Dhanno Services' Indian head office in consideration for the offshore services
- continue to tax the payments made to Dhanno Services in consideration for the onshore services.
Background on the law amendment
The Treasury Laws Amendment (Australia-India Economic Cooperation and Trade Agreement Implementation) Bill 2022External Link (the Bill) received royal assent on 23 November 2022.
The Bill amends the International Tax Agreements Act 1953 (ITAA 1953) to stop Australian taxation on certain payments or credits made to entities that are Indian residents for tax purposes.
Prior to the amendment, payments or credits made to Indian residents by Australian customers for technical services provided remotely (not through a permanent establishment in Australia) were taxable in Australia. This was due to the interaction of the Income Tax Assessment Act 1997 (ITAA 1997) and the Indian Agreement.
Specifically, these payments or credits were taxable because they were:
- covered by Article 12(3)(g) of the Indian Agreement
- considered to be sourced in Australia because of the operation of Articles 12 and 23 of the Indian Agreement
- included as assessable income of a foreign resident under paragraph 6-5(3)(a) of the ITAA 1997.
The outcome that such payments or credits were taxable in Australia was subject to litigation in the Federal Court of Australia in the following cases:
- Tech Mahindra Limited v FCT [2015] FCA 1082
- Tech Mahindra Limited v FCT [2016] FCAFC 130
- Satyam Computer Services Limited v FCT [2018] FCAFC 172.
These decisions confirmed that the relevant payments or credits were taxable in Australia.
To read our view on the decision handed down by the Federal Court in Tech Mahindra Limited v FCT [2016] FCAFC 130, see the Decision impact statement.
On 2 April 2022, the Australian Government agreed to stop the taxation of certain payments or credits made to Indian residents by Australian customers for technical services. These are for payments or credits made for services provided remotely (not through a permanent establishment in Australia) that are covered by Article 12(3)(g) of the Indian Agreement and are not royalties within the meaning of the ITAA 1936.
The Australian Government agreed to implement this legislative change in a similar timeframe to the implementation of the Australia-India Economic Cooperation and Trade Agreement (AI-ECTA).
AI-ECTA entered into force on 29 December 2022. The amendment to the ITAA 1953 made by the Bill applies to income years commencing on or after 29 December 2022.
Check when payments and credits to Indian residents providing technical services remotely are not taxable in Australia.