When you pay a supplier, you may be required to keep back part of the money and deposit it with the tax authority on the supplier's behalf. This is withholding tax. It is simple on paper, and it goes wrong in practice for one reason: the maths is done by hand, at payment time, usually in a hurry. This guide explains how withholding tax on supplier payments works for a trading business, and how to make it automatic.
What withholding tax on payments means
Withholding tax (WHT) means that you, as the buyer, deduct tax from what you owe a supplier and pay the deducted amount to the government instead of the supplier. The supplier receives the net amount. The deducted amount is your liability until you deposit it.
The rate depends on the kind of supplier and the kind of payment, and the rules change. Confirm the correct rates with your tax adviser. The examples here use a rate of 4 percent only to show the method.
A worked example
You owe a supplier Rs 100,000 on a bill. The WHT rate is 4 percent.
| Item | Amount |
|---|---|
| Bill (gross) | Rs 100,000 |
| WHT at 4 percent | Rs 4,000 |
| Cash you pay the supplier (net) | Rs 96,000 |
The entry when you pay is:
| Account | Debit | Credit |
|---|---|---|
| Accounts payable (supplier) | 100,000 | |
| Bank | 96,000 | |
| Withholding tax payable | 4,000 |
The supplier's account is cleared in full, even though he received Rs 96,000. The Rs 4,000 sits in a liability account until you deposit it with the tax authority, when you debit the liability and credit the bank.
The part that goes wrong: partial payments
Suppliers are often paid in instalments. If you pay Rs 48,000 in cash, how much of the bill have you settled?
- Net paid: Rs 48,000
- Gross settled: 48,000 ÷ 0.96 = Rs 50,000
- WHT withheld: Rs 2,000
Half the bill is settled and half the tax is withheld. Anyone doing this by hand across ten bills and three part payments will make errors. A common one is deducting the full Rs 4,000 on the first small payment, or never deducting it at all.
Common mistakes
- Deducting tax from the net instead of the gross. The rate applies to the amount owed, not to the cash handed over.
- Forgetting WHT on part payments.
- Mixing suppliers with and without WHT. Each bill has its own rate, or none.
- Not recording the liability. The deducted money then disappears into the bank balance.
- Depositing late. Keep a monthly routine for the deposit.
- Using the wrong rate because it was typed from memory. Set up tax codes once and choose them.
A routine that works
- Create your WHT tax codes once, with their rates.
- Choose the right code when you enter each supplier bill.
- At payment, let the system calculate gross, tax and net.
- At month end, check the withholding tax payable balance, deposit it, and record the deposit.
- Keep the deposit proof with the month's records.
For the journal entry in more detail, see how withholding tax is posted on a vendor payment. NGOs follow the same method for vendor payments. See withholding tax for NGOs in Pakistan.
How OneAccounts does it
With the Tax management add-on, you set up withholding tax codes with their rates. When you enter a supplier bill, you choose the WHT code, and the bill keeps its rate and tax amount.
The saving happens at payment. On the payment screen, tick a bill and the system fills in the net amount that settles it in full. Or type a net amount yourself for a part payment. The gross settled and the tax withheld are calculated for you, rounded to the paisa, and the total "WHT to Tax Payable" is shown before you save. The tax goes to your Withholding Tax Payable account, and the supplier's balance reduces by the gross amount. Bills with no WHT code are paid as normal.
Tax management is an optional add-on. See Trading ERP software.
Frequently asked questions
Is withholding tax charged on the bill or on the payment?
The rate is chosen on the bill, and the tax is deducted when you pay. For a part payment, a proportionate part of the tax is deducted.
What do I do if the supplier gets a different net amount than expected?
Check the rate on the bill. The supplier's net is the gross less the tax at that rate.
Can I pay several bills in one payment with different WHT rates?
Yes. Each bill carries its own rate, and the payment screen totals the tax for all the bills you selected.
Where does the withheld amount appear in the accounts?
In the withholding tax payable account, which is a liability until you deposit it.
Do I need the add-on to record WHT?
The automatic calculation on bills and payments comes with the Tax management add-on.