RisingERP - Witholding Tax (WHT)

Withholding Tax (WHT) Category

Withholding Tax Category, also known as Withholding Tax (WHT).

As per this category, individuals responsible for making payments are mandated to deduct tax at source at prescribed rates. Rather than receiving tax on income at a later date, the government requires payers to deduct tax beforehand and remit it to the Inland Revenue Service.

To access the Withholding Tax Category list, navigate to:

Home > Accounting > Taxes > Withholding Tax Category

1. Prerequisites

Before creating and utilizing a Withholding Tax Category, it is advisable to create the following:

1. Supplier
2. Customer

2. How to Create a Withholding Tax Category

In RERP, Withholding Tax Categories are available by default for most cases. However, additional categories can be created if needed.

Follow these steps:

a. Go to the Withholding Tax Category list and select New.

b. Enter a unique name

c. Specify a Category Name (Dividends, Professional Fees, etc.).

d. Enter the Withholding Tax Rate against a Fiscal Year (5% for Individual or 10% for Corporate entities).

e. Set the threshold for a single invoice or the sum of all invoices.

f. Select an account against your Company to which tax will be credited.

g. Add more companies and accounts as needed.

h. Save.

Under accounting details, the WHT account is added for each Company in the system.

2.1 Assigning Withholding Tax to Supplier

After saving, it can be assigned to a Supplier:

2.2 How Does the Threshold Work?

Consider a Supplier on whom a Withholding Tax Category is applied.

For example, let's say a rate of 5% will be applicable on an invoice where the Single threshold is 20,000, and the Cumulative threshold is 30,000. If an invoice is created with a grand total of 20,000, then the single threshold will be triggered, and a 5% tax would be charged.

However, if the invoice amount totals up to be 15,000, then no tax will be charged as it didn't cross the threshold. If another invoice is created against the same supplier with a total of 15,000, then although it didn't cross the Single threshold, charges will be deducted since the sum of the last invoice and this invoice adds up to be 30,000, which is equal to the specified Cumulative threshold.

3. Using Withholding Tax

3.1 Use in Purchase Invoice

If the Supplier has the withholding tax field set, then upon selecting that Supplier, a checkbox will become visible in the Purchase Invoice to select whether to apply tax or not.

Let's create an invoice for 90,000. Saving the invoice automatically calculates tax and appends it in the taxes table.

To see the effect of the Cumulative threshold, let's create an invoice with an amount of 10,000 and submit it.

Although the invoice amount didn't cross the Single threshold (30,000), we see that tax has been charged. This is because the previous and the current invoice adds up to be 1,10,000, which exceeds the Cumulative threshold. Hence, tax based on the rate provided in the Withholding Tax Category will be applied accordingly.

Note: On submitting the invoice, three GL Entries are created:

1. Debit from the expense head
2. Credit in Creditors account
3. Credit in the account selected in Withholding Tax Category.

3.2 Deducting Tax at Source on Advances

3.2.1 Deduction Advance WHT against Purchase Order

Set up Withholding Tax Category against a supplier and make a Purchase Order against the supplier. One point to remember here is not to check "Apply Withholding Tax" check in the PO, as the PO has to be generated for the full amount.

Create Payment Entry against that Purchase Order. In the Taxes and Charges section, enable "Apply Withholding Tax" and enter other details and then save and submit the entry.

Create a Purchase Invoice against this order and enable "Set Advances and Allocate(FIFO)" so that payment linked to the corresponding order is automatically applied. No Tax will be withheld in the Purchase Invoice if the Tax paid on advance is more than or equal to the tax amount in the Invoice. Tax Will be withheld only for the excess amount if applicable.

3.2.2 Deducting WHT against Advances Paid (Using Payment Entry)

Select "Payment Type" as "Pay." Select "Party Type" as "Supplier" and the appropriate supplier. Enter the paid amount, paid amount should be the amount before WHT deduction. Under the Taxes and Charges section, check "Apply Withholding Tax Amount" and select Withholding Tax Category. Click on Save. WHT will be auto applied. Submit the entry. The same will also be visible in the WHT payable monthly report.

3.3 Advanced Options in Withholding Tax Category

1. Consider Entire Party Ledger Amount: In many situations, the threshold has to be calculated on the entire party ledger amount instead of the sum of the net total of specific invoices. On enabling this check, the cumulative threshold will be checked against the sum of the grand total of all the invoices against a particular Supplier/Customer.
2. Only Deduct Tax On Excess Amount: On enabling this, tax will be deducted only on the amount exceeding the threshold and not the entire amount. For example, if the cumulative threshold is 80,000, and if the cumulative amount goes till 85,000, the tax will be applied only on 5,000 and not the entire 85,000.
3. Round Off Tax Amount: Enabling this check will round off the calculated tax amount to the nearest integer value (Normal Rounding Method).