An NGO pays many vendors: venues, trainers, printers, transporters, contractors. On many of those payments tax has to be withheld and deposited. If this is recorded loosely, three things go wrong at once: the vendor's balance is wrong, the tax payable is wrong, and the project budget is charged the wrong amount. This guide shows how to record it so all three stay right.
The rates and rules in this guide are examples. Withholding rules change, and they depend on the vendor and the type of payment. Confirm them with your tax advisor before you use them.
What withholding tax means for the NGO
When you pay a vendor, the law may require you to keep back part of the payment and deposit it with the tax authority on the vendor's behalf. The vendor receives the net amount. The tax you kept back is a liability of yours until you deposit it.
The most important rule for NGOs: the budget is charged the full amount
The expense is the full invoice amount. Withholding does not make the service cheaper. It only changes how the invoice is paid: part to the vendor, part to the tax authority.
So when you check a bill against the project budget, you check the gross amount. If you check only the amount that left the bank, the budget looks healthier than it is, and the shortfall appears later when you deposit the tax.
A worked example
A trainer sends a bill of Rs 200,000 for a workshop. An illustrative withholding rate of 4 percent applies. This is an example only.
| Item | Amount (Rs) |
|---|---|
| Bill (gross), charged to the project budget | 200,000 |
| Tax withheld (4 percent, example) | 8,000 |
| Paid to the trainer from the bank | 192,000 |
Step 1: record the bill
| Account | Debit | Credit |
|---|---|---|
| Workshop expenses (project, activity, location, donor tagged) | 200,000 | |
| Accounts payable (trainer) | 200,000 |
Step 2: record the payment
| Account | Debit | Credit |
|---|---|---|
| Accounts payable (trainer) | 200,000 | |
| Withholding tax payable | 8,000 | |
| Bank | 192,000 |
The trainer's balance is now zero. The bank moved by 192,000. The 8,000 sits in a liability account until you deposit it.
Step 3: deposit the tax
| Account | Debit | Credit |
|---|---|---|
| Withholding tax payable | 8,000 | |
| Bank | 8,000 |
After the deposit the liability is cleared.
Setting it up so it is done the same way every time
- Agree the tax codes. One code per kind of payment and rate, set up once.
- Decide the base. Some rates apply to the gross amount, others to the net. Your advisor will tell you which.
- Record withholding on the bill, not by hand at payment time. Then the tax is worked out the same way every time.
- Keep a withholding tax payable account and review it at every month end. Its balance should equal what you have withheld and not yet deposited.
- Keep the deposit proof with the payment, so an auditor can follow it.
Month-end check
- List every payment made this month with its tax withheld.
- Add them up and compare with the balance of the withholding tax payable account.
- Check that everything withheld has been deposited, or is scheduled to be.
- Check that any vendor who gave an exemption certificate has it on file.
Common mistakes
- Reducing the bank line by the tax in the wrong place. The bank only moves by what you actually paid.
- Charging the budget the net amount. The project cost is the gross amount.
- Settling the vendor's bill by the net amount only. The vendor then appears to be owed the tax portion for ever.
- Editing the original entry. Reverse and repost, so the audit trail stays complete.
- No deposit record. Withheld tax with no deposit trail is a finding waiting to happen.
How OneAccounts handles it
With the Tax management add-on you set up tax codes and rates once. A vendor bill carries its withholding. When you pay, you enter the amount that left the bank; the tax is worked out and both sides are posted, so the vendor balance and the tax payable agree. NGO bill lines carry the project, activity and location, and are checked against the budget for that line before they post.
OneAccounts records and calculates the withholding. It does not file returns for you, and the rates remain yours to set with your advisor.
See NGO accounting software, or read the shorter walk-through, how withholding tax is posted on a vendor payment.
Frequently asked questions
Does withholding tax reduce what the project spends?
No. The project spends the full invoice amount. Withholding only splits the payment between the vendor and the tax authority.
Which account holds the tax I have withheld?
A liability account, usually called withholding tax payable, until you deposit the tax.
Should the budget check use the gross or the net amount?
The gross amount. That is the real cost of the activity.
What if the vendor gives an exemption certificate?
Keep the certificate on file and apply the exempt treatment only for the period and amounts it covers. Ask your advisor how to record it.
Can software file my withholding returns?
OneAccounts calculates and records the withholding, and gives you the figures. Filing remains with you and your advisor.