When an Indian software company invoices a US client for USD 10,000, the US client may be required by US tax law to withhold 15% or 30% (depending on applicable DTAA) from the payment. The Indian company receives only USD 8,500 (or USD 7,000). The US client deposits the withheld amount with the US IRS on behalf of the Indian company. The Indian company then claims a credit of the withheld tax against its Indian income tax liability (or as a refund if the credit exceeds the Indian tax due), provided India and the US have a DTAA that permits such credit.
Zoho Books does not have a built-in international withholding tax module the way it has TDS. The recommended approach is: raise the invoice for the full amount, record the payment received for the net amount received, and post a journal entry debiting a “Foreign WHT Receivable” (current asset account) and crediting Accounts Receivable for the difference. At year end, your CA will determine how much of the receivable can be claimed as an DTAA credit and whether any excess becomes a business expense.
India has DTAAs with over 90 countries, most of which provide for reduced withholding tax rates on service fees, royalties, and interest. For example, the India-USA DTAA caps withholding on service income for Indian IT companies at lower rates than the standard US withholding rate. To claim the reduced rate, the Indian company must provide a Tax Residency Certificate (TRC) to the foreign client. Zoho Books stores documents, so you can attach the TRC to the customer record for easy retrieval.
International withholding tax in Zoho Books is the tax deducted by a foreign customer from payments to an Indian business. The Indian business records the withheld amount as a receivable and claims a DTAA credit in their Indian income tax return.
Record the full invoice as revenue. For the payment, record the net amount received and post a journal entry for the withheld amount to a Foreign Tax Withholding Receivable asset account, crediting Accounts Receivable.
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