22 August 2014
I want to know the treatment of withholding tax deduction from Income received from Foreign Client for services rendered abroad. What are the tax implications in India & how it is to be accounted for in the books of accounts?
23 August 2014
you need to compute the tax credit under section 90/91 (as might be applicable). the tax credit amount should be treated as an asset similar to advance tax. The difference between tax paid outside India and foreign tax credit should be written off to reserves/capital account
25 August 2014
Thanks for your reply. Further I want to know how to calculate the tax credit if the invoice for the service is raised in USD & withholding tax deducted by foriegn client is in USD. What exchange rate to be applied? Exchange rate on Date of deduction/realisation or date of booking invoice? Any documents to be collected from the foreign client as a proof of tax deduction?
03 August 2025
Great questions! Here’s how you handle the withholding tax deducted abroad on income from foreign clients for services rendered outside India in terms of tax credit calculation and accounting:
1. How to Calculate Foreign Tax Credit (FTC) in INR? Foreign Tax Credit under Section 90/91 of Income Tax Act is available for taxes paid outside India, to avoid double taxation.
Since invoice and withholding tax are in USD, you need to convert both the gross income and the tax deducted to INR.
2. Which Exchange Rate to Use? Invoice amount (income recognition): Use the exchange rate on the date of invoice booking (date of raising invoice or date of rendering service) for revenue recognition.
Withholding tax deducted (tax payment): Use the exchange rate on the date of actual tax deduction or withholding by foreign client for tax credit calculation.
This is because tax is considered paid/deducted on the actual withholding date, so that date’s rate is appropriate.
3. How to Compute Tax Credit? Convert the gross income to INR using invoice date exchange rate.
Convert the withholding tax amount to INR using exchange rate on withholding date.
Claim FTC for lesser of:
Foreign tax paid (converted to INR), or
Indian tax payable on that foreign income.
4. Documents to Collect from Foreign Client To substantiate the foreign tax credit claim, you should collect:
Withholding tax certificate issued by foreign client or their tax authorities.
Proof of payment/deduction of tax (like bank statement, tax deduction statement).
Copy of contract and invoice.
Any certificate evidencing tax residency of foreign client (to claim DTAA benefits).
5. Accounting Treatment Record the gross income at invoice date rate.
Record the withholding tax deducted as an asset (advance tax / tax recoverable).
Upon filing the Indian tax return, adjust the foreign tax credit against Indian tax liability.
Any excess foreign tax credit (not usable in current year) can be carried forward as per Income Tax Act provisions.
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