Tax Code Treatment

Please help with the process of the tax code. illustration:

I made a purchase to a vendor of 1000. In the transaction I had to keep a journal as follows:

Purchase 1000 (db)
VAT Input 100 (db)
Account Payable 1020 (cr)
Income Tax Liabilities 80 (cr)

The use of the tax code in 1 line on the purchase invoice cannot be used to impose 2 taxes at a time. I created tax code on multiple rate options by:

  1. Input VAT of 10% which refers to the account on debit i.e. VAT INPUT (will be journalized on debit)

  2. Income tax liability of 2% refers to a credit account that is INCOME TAX (should be journalized in credit and reduce debt but what happens is journalize debit).

So with a transaction of 1000 formed is :
purchase 1000 (db)
Input VAT 100 (db)
Accounts Payables 1120 (cr)
Income tax -20 (posted on credit causing an abnormal balance in this account).

Should:
Purchase 1000 (db)
Input VAT 100 (db)
Accounts Payables 1080 (cr)
Income Tax Liabilities 20 (cr)

Please help.

First, why are you including income tax on a purchase invoice?

Second, all your debits and credits make it very difficult to relate this to Manager. Please illustrate this with screen shots of the actual Edit screens.

  1. In my country there are regulations that require buyers to withhold income tax when paying a seller. That’s why I include the income tax.

  2. This is my tax code setting. I use tax rate Custom and Multiple rates.

First line I set to income tax with 2% and account refer to liability account in balance sheet.
Second line I set to VAT in 10 % and refer to asset account in balance sheet.

But what happens?

The Income Tax should reduce the Total Account Payable, but the fact is not. ( bill from supplier are 1000 and I should withhold income tax 2% of 1000.)

How to make income tax 2% and VAT 10% at once per line in purchase invoice?

Why don’t you use the ‘Deduct withholding tax’ option on the invoice entry page?

image

Why it’s not appear on my invoice tab?

Check Manager’s version. I’m using v20.7.75.

@Mark, the Deduct withholding tax checkbox is on sales invoices, not purchase invoices.

@ejjaadiargo, you are using the wrong process. You should not be applying a tax code for withholding tax. You should apply your normal VAT tax code, as you would on any purchase invoice that does not require you to withhold tax at the source.

The income tax is a tax withheld at the source. See this Guide: https://www.manager.io/guides/12346. Follow the process in the last major section, headed Purchase invoice process.

That’s not the Sales Invoices tab but the Sales Orders tab. It seems you don’t have the Sales Invoices tab activated, which is a bit weird unless you are only purchasing and not selling.

OK, but he’s showing the Sales Orders tab and not the Purchase Invoices tab.

He also has four other unnecessary tabs. But it is certainly possible to operate without sales invoices.

I still don’t understand why Withholding Tax is not implemented also in purchase invoices.

Because you don’t need it. On a sales invoice, you need to track an asset through two phases: withheld by a third party customer and available for application against your own tax due after the customer remits to the authority. With a purchase invoice, you are always in full control. You pay part of the invoice balance to the supplier and hold part to remit to the government. On the sales invoice, you have probably already applied a tax code, and withholding must be calculated on the tax inclusive amount. On a purchase invoice, you make a straight deduction of an amount that should be listed on your supplier’s sales invoice to you.

[quote=“Tut, post:11, topic:28771”]
withholding must be calculated on the tax inclusive amount.
[/quote] not in Italy, here is on tax exclusive amount but that’s not my issue.

The problem is that withholding on purchase invoices in Italy is cash based even if we are on accrual based accounting, ie the withholding is due to the government only once we pay the invoice to the supplier. The mess is to create such kind of report.

I think that having a standardised way for both the withholding can lead to a consistent reporting.

Putting some kind of withholding tax checkbox on a purchase invoice will not address the Italian requirement for cash-based remittances. The way to do that is to enter the deduction on the payment form.

As I said it’s not our issue since we are not subject to withholding. The issue is on the recording of the accrual of the taxes on purchase invoices that are cash based.

In my country there is regulation for some entity must withhold the income tax they should paid to the suppliers.

Example : If your suppliers bill you for 1000 then you must withheld 20 and you pay for 980.

Usually should there are choice that withhold tax on invoice or in payment. If we want to record the accrual for income tax in each purchase we can choose withhold on invoice.

But refers to https://www.manager.io/guides/12346 , withhold for income tax on purchase invoice must use Chart of Account (as a liability and record as a standing alone line in purchase invoice).

That"s what we have been doing for years. The problem is the automatic reporting. We have to prepare the list manually each month

@ejjaadiargo, I think you misunderstand my post. I understand the situation in your country. That is exactly what the Guide addresses in its section Purchase invoice process.

My comments were directed towards @Davide’s question about why there is no checkbox on purchase invoices like there is on sales invoices. As I already wrote, the reason is that the program does not need to track withheld amounts through multiple phases like it does with sales invoices. With a sales invoice, you need a method for notifying customers of the amount they must withhold. You do not need that on a purchase invoice.

Yes but on that guidence tell us to create withhold tax in standing alone line. It would be little bit difficult if on one invoice there are purchase of services or goods. The two purchases use different tax regulation and the withhold tax invoice can’t to be refers directly to which one of lines.

I do not see why this would be a problem. You can have as many line items for withholding tax on a purchase invoice as necessary. Each one can post to a different tax liability account, if that is necessary. This actually gives you more flexibility than a checkbox (like on a sales invoice). The checkbox on a sales invoice results in all withholding tax being posted to the same account. There is no choice.