Withholding Tax on Purchase

There is a serious issue about withholding tax on purchase of cost item .
When we purchase and withhold tax, there should be impact on-

1. Accounts Payable (BS)
2. Tax Payable (BS)
3. Net/Total Purchase (Tax Summary)
4. Tax Liability (Tax Summary)
5. Cost Account (P/L)


A purchase of amount 105, withholding amount 5
According to the guides, the record is-

Cost Account (P/L) = 105 (it should be 100)
Tax Payable (BS) = 5
Accounts Payable (BS) = 100
Net/Total Purchase (Tax Summary) = Nothing Shows Here
Tax Liability (Tax Summary) = Nothing Shows Here

I don’t know about your country but in my country, withholding tax is effected on payment to suppliers, meaning it shouldn’t affect account payable.


A purchase of amount 105, withholding amount 5

Step 1. Recognising the liability

Debit Expense account 105
Credit Supplier’s account 105

Step 2. Paying the supplier

Debit Supplier 105
Credit Cash/bank 100
Credit Withholding tax payable account 5

In Manager, you have to create a liability account and use it for this purpose

Enter negative amount to do the deduction (5 in this case) into another account (Withholding tax payable account and pay to tax authorities from there.

See below an example assuming cost is 100 and withholding tax is 7.5%. The withholding tax account has been created as a non inventory item and directed into the Withholding tax payable account.

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The cost of the purchases are 105 - this is the amount charged to your cost account.
But the payment associated is split in to two - you owe your supplier 100 and the tax authorities 5

The Tax Summary does not included Withholding Tax but Value Added Tax or other similar taxes

Your first two assumptions are incorrect for purchases. See the Guide: https://guides.manager.io/12346. As it says, “…no automatic accounts are involved….” Both Accounts payable and Tax payable are automatic accounts, hard-coded to operate in specific fashions.

One thing I haven’t mentioned earlier.
The tax I am talking about is Value Added Tax (VAT).

  1. When we sell 100+5 (VAT), P/L and Tax Summary shows Sales = 100

  2. When we purchase 100+5 (VAT), P/L and Tax Summary shows Purchase = 100

  3. When we purchase 100+5 (VAT)
    and withhold 5 (VAT), P/L shows Purchase = 105 and Tax Summary shows nothing. Isn’t it wrong?

Tax Summary shows those sales where withholding tax involved.
So, why not purchase including withholding tax?

VAT is not a withholding tax so I do not understand your item 3.

Items 1 and 2 seem to be correct

Would you care to post images of the edit screens for your invoices?
Are you using cash accounting or accrual accounting?

VAT is a withholding tax in many cases.
I currently record withholding tax as the guide suggests. And that’s the problem.

VAT and withholding are two separate things. Withholding is not a tax at all, in the sense that other tax codes are used in Manager. A VAT tax code records either (a) a tax to be collected from customers on behalf of the tax authority, in addition to the cost of goods or (b) tax to be paid to a supplier, who is also serving as an agent of the tax authority in collecting tax from you.

On the other hand, withholding is not a separate tax amount, but a prepayment/precollection of a tax imposed by some other means. Frequently, withholding is a way of ensuring income tax compliance, although it can also be connected with enforcement of other taxes. The key factor is that withholding is not related to any line item on an invoice, but to the entire amount.

Withholding on purchase invoices does not appear in the Tax Summary because it isn’t a tax (although the terminology can be confusing). It is merely your setting aside of an amount due to your supplier for direct payment to the tax authority instead of to the supplier. That is why the procedure outlined in the Guide calls for a negative line item posted to the specially created Withholding tax payable account. That way, the amount you pay to your supplier is reduced by the amount you will pay to the tax authority.

This is also why withholding is not posted (for either sales or purchase invoices) to the same Tax payable account as VAT. The tax transaction itself is recorded under the VAT tax code.

VAT can be withholding.
It’s also called VDS (VAT Deduction at Source).

From the Guides-

Withholding tax may be a form of advance payment of income taxes, value added taxes, goods and service taxes, or some combination of these and other types of tax.

There are many rules & rates of VDS in our country as well as other countries I think.
Withholding can be related to line items on an invoice.

Would you elaborate please?

No, as implemented in Manager, it cannot. VAT is a tax, applied on a line item via a tax code. The total amount due is affected. Withholding is segregation of a tax payment for direct remittance to the tax authority. The total of an invoice is not affected, although the balance due for payment will be.

Read the first portion of the sentence: “Withholding tax may be a form of advance payment….” VAT is one type of tax for which payment is obtained in advance via withholding. But that does not make withholding another type of tax. As I said elsewhere, the similar terminology can be confusing and is unfortunate. But that is how it is referred to in some jurisdictions where it is used. That is why other jurisdictions are careful to refer to “tax withheld at the source” or “tax deducted at the source,” to make it clear that the action is not imposition of a tax, but segregation of the tax already imposed or potentially due in the future (such as income tax).

Not in Manager. It is applied to the total of a sales invoice, including taxes imposed via tax codes. Or, it is added as its own line item—unrelated to any other line item—to match the amount advised on a supplier’s sales invoice to you.

Yes, gladly. Actual tax is calculated only via a tax code. When a tax code is applied, the relevant tax amount is added to or deducted from Tax payable (or other designated control account) to calculate the amount of net tax obligation to the tax authority. Any taxable transaction will be listed in the Tax Transactions report under the heading for the particular tax code.

Withholding is posted elsewhere, as described in the Guide. It is not reported in the Tax Transactions report because it is not a tax transaction. It simply represents amounts that will be paid by one party or the other directly to the tax authority instead of going through the Accounts receivable or Accounts payable chain.

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That’s why I created this post.

I agree. It’s a process. Any type of tax can fall into this process.

Now, I am explaining my problem a bit more.

Scenario A :black_large_square: When I receive service from NRB Telecom Ltd. They issued invoice-

1,15,000 + (VAT4.5%) 5,075 = 1,20,175

Normally, I would pay 1,20,175 to NRB Telecom Ltd. and take rebate 5,075


Scenario B :black_large_square: But government requires VAT to be deducted at source for some specific service which includes the service we received from NRB Telecom Ltd.

So, I have to pay 1,15,000 to NRB Telecom Ltd. and withhold 5,075 to pay to the VAT authority directly.
If I follow the guides-

Please help me to make this right.

It looks as though, in Scenario A, you applied a custom tax code named VAT 4.5% (Purchase). But in Scenario B, it seems as though you applied no tax code, but added 4.5% withholding. But I cannot be sure of that unless you post the edit and view screens for the sales invoice in question.

The way to use withholding in your situation is to combine what you seem to have done in Scenarios A and B, but correct the mistake you made in Scenario B. That is:

  • Enter the unit price as 1,15,000 and apply the VAT 4.5% tax code, like you did in Scenario A
  • In addition, add a second line item for withholding, like you apparently did in Scenario B, but enter the withholding amount as a negative number.

The result will be a purchase invoice that adds 1,15,000 to your Co-Loation expense account and deducts 5,175 from Tax payable (because the VAT charged by your supplier reduces the amount owed to the tax authority for VAT collected from customers). The balance due on the purchase invoice will be the net of 1,15,000 price, plus 5,175 VAT, minus withholding of 5,175, for a balance due to your supplier of 1,15,000. At the same time, the withholding amount will be credited to the Withholding tax payble account you should have set up if you followed the Guide.

In summary, the situation on purchase invoices when withholding covers VAT (as opposed to income tax, for example), is not to do one or the other, but to do both. Apply the tax code and subtract the withholding. (This was not illustrated in the Guide to avoid complicating the illustration. Perhaps the Guide should be edited.)

You guess everything right about my procedure and I followed the guides.

Assuming no other sales & purchase I followed your suggestion here-



Summary > Liabilities

If I spend money (pay VDS),

Tax payable = -5,175
VDS = 0

You see, tax payable have balance.
I tried many different procedures. If I make one thing correct, another got wrong.
It’s a logical problem in Manager.

It is not a logical problem. VDS shows a balance of zero after you have remitted to the tax authority. That is because the tax you withheld, which would normally have been paid by you to the supplier and by the supplier to the authority, has instead been paid directly by you to the authority.

Tax payable shows a debit balance of -5,175 because that much has been charged against your business as input VAT. Now imagine you sell something and assess output VAT in the same amount to a customer. Tax payable will go to zero, showing that the amount assessed by you to customers equals the amount paid by you. In a normal situation, the amount you paid would have gone to your supplier. In a withholding situation, you bypass the supplier and pay directly to the authority.

When the Tax Summary lists Tax Paid, it is referring to tax assessed on the purchase invoice, not the actual payment of your VDS account. This corresponds to the column Tax Collected, which actually refers to tax charged to customers, not the customers’ payment through Accounts receivable. The slightly misleading terminology is standard accounting phrasing, which normally refers to taxes having been collected and paid when they have really only been included on invoices. This comes from the fact that the tax authority does not care how late in payment you or your customers are. The authority only cares when the tax became due, and that was at invoice time.

I don’t know how to explain this any other way. Everything is working correctly, as long as you make the entry the way you showed.

No it’s not.
Assuming same amount of output VAT-

:black_large_square: Normal Scenario

Output VAT 5,175
Rebate (Input VAT) - 5,175
Tax Payable 0

:black_large_square: Withholding Scenario

Output VAT 5,175
Rebate -0
Tax Payable 5,175

In our country, normal VAT rate is 15%.
If we purchase at this rate, we can take rebate.
If we purchase at truncated rate like 4%, 4.5%, 5%, according to different rules, we-

1. don’t take rebate, don’t withhold (It’s just a loss)
2. don’t take rebate, but withhold (my case)


My tax payable is equal to the output VAT.

The invoiced totalled 1,20,175.00

Yes, and as you “2. don’t take rebate, but withhold” then there is no output VAT to claim so the


is correct.

You can’t enter into the transaction the rebate and then say you "don’t take the rebate"

As illustrated by, which doesn’t make sense 0000000%20Bug%202a

@Abu_Hasan, you have introduced complications very late in the discussion that significantly change the situation.

You must understand that the Tax payable account in Manager is designed to offset output VAT versus input VAT. This is what you describe as “Normal Scenario” and is a typical VAT scheme. The resulting balance represents money you owe to the authority (if you assess more VAT to your customers than you pay to your suppliers) or the authority owes you (if you pay more to your suppliers than you assess your customers). But, if that is not your situation, you cannot apply tax codes the same way to sales and purchases.

What you call “Withholding Scenario” is actually two different scenarios. In the first, in which you said you “don’t take rebate, don’t withhold,” the system is not acting like a value added tax at all. Instead, it is like a consumption-based sales tax. You are assessed the tax by your supplier, you pay the supplier, and you have no recovery. In this situation, no tax code should be applied on the line item in the purchase invoice. Rather, the unit price should include the tax amount. By this, I do not mean to check the box that prices are tax inclusive, because that only changes the way the offsetting tax would be calculated. This situation is illustrated by Example 2 in this Guide: https://guides.manager.io/8901.

In the additional scenario, when you “don’t take rebate, but withhold,” the system is also acting as a consumption-based sales tax, not a typical VAT. But in this case, instead of paying the tax to your supplier, you pay it directly to the authority. So again, you should not apply a tax code, because that would offset input VAT against output VAT. Instead, include tax in the unit pricing. Withhold an amount that backs the tax out of your payment to the supplier. Using your earlier example:

Purchase price, including 4.5% VAT: 1,20,175
Withholding: -5,175
Total purchase invoice balance due: 1,15,000

Note: the withholding is not 4.5% of the purchase price including tax. It is the negative of the tax amount from your supplier’s invoice, which is 4.5% of the untaxed price, or 4.30622% of the price with tax. Hopefully, your supplier will indicate the amount to withhold on its invoice.

In both scenarios included in your “Withholding Scenario,” you will not see the transaction in your Tax Summary or Tax Transactions reports. This is because, from Manager’s perspective, they are not tax transactions affecting the balance of Tax payable. They are just higher-priced purchases. And in the last case, you end up paying part of the purchase price to the tax authority.

Except one thing everything is clear.
P/L should shows 1,15,000. I talked wth authority, they confirmed.

Manager should have feature to handle this kind of problem. What do you think?

For the P&L to show 1,15,000 from an invoice charging 1,20,175 then you must be claiming the rebate but you advised that “2. don’t take rebate, but withhold (my case)”.

You can’t have it both ways - “don’t take rebate” and the P&L show 1,15,000. It is not mathematically possible.

Then you should ask the authority how to make the entry.

However, yes to taking the rebate and yes to P&L being 1,15,000 then that is mathematically possible, including having the withholding.

After all these discusson I have learnt,
When I can’t take rebate it is a loss (expense).

So the purchase entry should be-
Co-Locaton: 1,15,000
Loss on VAT: 5,175
Total: 1,20,175

And the payment to supplier-
Supplier: 1,20,175
VDS: -5,175
Total: 1,15,000

And payment to authority-
VDS: 5,175