Many startups and companies in India work with freelancers, consultants, or firms based outside India — for services like design, software development, legal advisory, digital marketing, and more.
But the common question is:
❓“Do we need to create an ODI or foreign subsidiary just to pay them?”
👉 Short Answer: No, you don’t.
Paying foreign consultants is completely legal under FEMA and doesn’t require ODI — provided it’s structured correctly.
Let’s break it down.
✅ What the Law Allows
Under the Foreign Exchange Management Act (FEMA):
- Payments for services received from persons resident outside India are treated as Current Account Transactions
- These can be made freely, without ODI approval, subject to:
- Service is genuine & legal
- Purpose is permitted
- Proper documentation is maintained
So yes, your Indian company can pay a foreign consultant directly — no need to set up a subsidiary, WOS, or file under ODI.
📑 FEMA Category: Current Account vs Capital Account
| Transaction Type | FEMA Category | ODI Required? |
|---|---|---|
| Payment to foreign consultant | Current Account | ❌ No |
| Investment in foreign company | Capital Account | ✅ Yes |
| Loan to foreign entity | Capital Account | ✅ Yes |
| Purchase of service (one-time) | Current Account | ❌ No |
💵 How to Pay Foreign Consultants Legally
- Invoice: Get a proper invoice from the foreign consultant
- Agreement: Preferably have a short contract or email confirmation of scope
- Form 15CA/15CB: Required for payments above ₹5 lakh or under certain categories
- Bank Remittance: Use your bank’s Authorized Dealer (AD Category-I) forex desk
- Purpose Code: Use the correct FEMA purpose code (e.g., S0013 – Business and management consultancy) while remitting
📋 Documents You May Need
| Document | Purpose |
|---|---|
| Invoice from foreign consultant | Proof of service and tax record |
| Agreement/engagement letter | Compliance trail |
| Form 15CA (mandatory for most) | Tax declaration to Income Tax Dept |
| Form 15CB (if applicable) | CA certificate verifying TDS compliance |
| Bank SWIFT/FIRC copy | Remittance proof for accounting/tax audit |
🧾 Is TDS Applicable?
Yes — payments to foreign consultants may attract withholding tax (TDS) under Section 195 of the Income Tax Act.
| Consultant Location | TDS Applicable? | Rate |
|---|---|---|
| Without PAN & DTAA | ✅ Yes | 20% or higher |
| With valid DTAA | ✅ Yes | 10% / 15% or lower |
| Royalty/technical services | ✅ | As per section 9 or DTAA |
💡 Take help from a CA to avoid default under Section 195 or Black Money Act.
❗ Mistakes to Avoid
- ❌ Sending money under “gift” or “miscellaneous” purpose
- ❌ Making payments via unofficial routes or crypto
- ❌ Skipping Form 15CA/CB, which can trigger TDS issues
- ❌ Paying through personal bank account of a director
- ❌ Paying advance for a long-term contract without a service agreement
🤔 When Do You Need ODI Then?
Only when your company:
- Invests in equity or debt of a foreign entity
- Sets up a branch, JV, or subsidiary abroad
- Acquires a foreign business or asset
- Issues a guarantee for a foreign entity
✅ Summary
| Scenario | ODI Required? | Action Needed |
|---|---|---|
| One-time service from US consultant | ❌ No | Invoice + 15CA |
| Monthly retainer to UK-based designer | ❌ No | Agreement + 15CA/CB |
| Setting up office in Dubai | ✅ Yes | ODI Filing + UIN |
| Paying freelancer on Upwork/Fiverr | ❌ No | Invoice proof + Bank docs |
💼 Need Help?
We assist Indian businesses in:
- Preparing 15CA/CB forms
- Remitting payments with correct FEMA purpose codes
- Ensuring TDS + DTAA compliance
- Advising on when ODI is truly required
