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Emerging & Next-Gen Compliance

AI & Technology Tax Advisory

AI Tax Advisory

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Overview

AI and technology businesses face a tax framework that was drafted before their products existed, and the ambiguity shows up at every stage: where the software is licensed, what is a 'service' for TDS, how cloud infrastructure is classified, and how an AI platform's cross-border revenue is taxed. This advisory service maps the tax treatment of your tech business to the statute — the royalty and fees-for-technical-services provisions of Section 9(1)(vi) and (vii) of the Income Tax Act 1961 for non-resident payments, the TDS obligations of Section 194J for fees for technical services, and the GST liability on software and SaaS under Section 9 of the CGST Act 2017.

The practical questions are where the money is won or lost. Is a reseller of a foreign AI tool liable to withhold TDS on the licence fee, or is the fee business income of the foreign principal? Is a software subscription 'royalty' under Section 9(1)(vi) or a business income outside India? What rate of GST applies to your SaaS offering, and can you take input credit on the cloud costs? Each of these changes cash flow and risk — a wrong TDS treatment exposes the payer to disallowance and interest, and a wrong GST classification exposes the business to a demand on the entire turnover.

Getting it wrong is not hypothetical. Payments to non-residents without proper withholding under Section 195 read with Section 40(a)(i) of the Income Tax Act get disallowed as an expense, which effectively turns a vendor bill into taxable profit. On the GST side, misclassifying software licences or data services can trigger a demand, interest and penalty under the CGST Act on a base of every invoice issued. For a startup or scale-up, one such demand can consume a funding round.

This service is for SaaS companies, AI and ML platforms, data and analytics firms, IT services exporters, and enterprises buying foreign software or AI services. We review your contracts, map each revenue and cost line to the right provision of the Income Tax Act, the CGST Act and, where relevant, the tax treaties, and give you a working TDS and GST matrix — so your invoices and vendor payments are compliant from day one.

How It Works

  1. 1

    Business & Contract Review

    We review your product, customer contracts, vendor agreements and cross-border flows to map the tax exposure.

    You do this3-5 days
  2. 2

    TDS & Withholding Map

    We map every payment — technical services, software licences, royalties — to Sections 192-195 and 194J of the Income Tax Act.

    Harun Raaj & Associates does this3-5 days
  3. 3

    GST Classification

    We classify your software, SaaS and data services under Section 9 of the CGST Act and confirm ITC eligibility on cloud and infrastructure costs.

    Harun Raaj & Associates does this3-5 days
  4. 4

    Compliance Matrix & SOPs

    You receive a working TDS-GST matrix, withholding rates, due dates and invoice formats to run compliant operations.

    Harun Raaj & Associates does this2-3 days
  5. 5

    Implementation & Support

    We review your first filing cycle, answer vendor queries, and stand by for audits and notices.

    Harun Raaj & Associates does thisOngoing

Frequently Asked Questions

My company pays monthly API fees to OpenAI (US) and Anthropic (US). Do I need to deduct TDS under Section 195?
TDS under Section 195 ITA 1961 (Section 393 ITA 2025 for payments from TY 2026-27 onwards) applies only if the payment constitutes royalty or fees for technical services as defined in Sections 9(1)(vi) and 9(1)(vii). The Supreme Court in Engineering Analysis Centre of Excellence v CIT (2021) held that end-user software licence payments are not royalties because no copyright is transferred. AI API subscriptions — where you access a service without acquiring any model rights — fall squarely in that category. Obtain a Tax Residency Certificate and Form 10F from the vendor, document that no copyright or exclusive right is granted, and TDS is then not applicable on those subscription charges.
Can I claim a full deduction for the cost of building and training a proprietary AI model, or is it treated as a capital asset?
The character of the expenditure is determined by the enduring-benefit test under Section 37(1) ITA 1961 (Section 58 ITA 2025). A one-time model build that creates a proprietary, reusable asset with a lasting competitive advantage is capital expenditure — eligible for depreciation at 25% WDV under Block 11 (intangible assets) in Appendix I of the Income Tax Rules 1962. Recurring costs — API charges, cloud compute for inference, retraining runs, fine-tuning on new data — are revenue in nature and fully deductible in the year incurred. Your CA must document the characterisation contemporaneously; a mixed build-and-run contract should be split.
We licensed our AI model to a group company in Singapore. What transfer pricing documentation is required?
Cross-border transactions between associated enterprises are governed by Section 92 ITA 1961 (Section 130 ITA 2025). Licensing of an AI model is an international transaction requiring arm's length pricing under Section 92C. Comparable uncontrolled price (CUP) is rarely available for proprietary AI; TNMM on the R&D entity's cost-plus margin is a commonly accepted method. Rule 10D requires contemporaneous documentation filed in Form 3CEB (CA-certified, due October 31 each year) and a master file in Form 3CEAA if aggregate group transactions exceed Rs 50 crore.
Our AI SaaS platform charges 18% GST to Indian clients. One client asked whether they can claim ITC on that. Are there any restrictions?
AI-powered SaaS is classified under SAC 998314 (other IT-enabled services) at 18% CGST+SGST or IGST. A GST-registered recipient engaged in taxable output supplies can claim input tax credit under Section 16 CGST Act 2017, subject to the vendor reflecting the invoice in GSTR-1 and it appearing in the recipient's GSTR-2B. ITC is blocked under Section 17(5) only for specific categories — IT services used in the course of business do not fall under any blocked category. Ensure your tax invoices comply with Rule 46 CGST Rules 2017 (IRN mandatory if your turnover exceeds Rs 5 crore).
We export AI analytics reports to US clients and invoice in USD. How do we claim a GST refund on our input costs?
Export of services qualifies as zero-rated supply under Section 16(1) IGST Act 2017. File a Letter of Undertaking annually in Form RFD-11 on the GST portal before your first export invoice so you can export without paying IGST. Claim the accumulated input tax credit refund in Form RFD-01 under Rule 89 CGST Rules 2017 within two years of the relevant date (invoice date for services). Each invoice must reference the LUT ARN, and you need a Foreign Inward Remittance Certificate (FIRC) or Bank Realisation Certificate confirming USD receipt to support the refund claim.

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