That now makes sense, but do you need to separate out the “Loss on VAT” into a separate account.
What should I do then?
Beacuse, my tax file should show the purchase is 1,15,000
If that is what the tax file should show, then you do need to use the “Loss on VAT” account.
Don’t you think it would be better if manager shows 1,15,000 and VDS in tax summary.
I am talking about re-designing tax summary including withholding tax.
@Abu_Hasan, you have circled all the way back around to basically the place you began, where you are considering withholding as a tax. It is not. It is only setting aside part of the amount you owe your supplier for direct payment to someone else. You may be confused by the fact that it is referred to as “withholding tax” and happens to be the same amount as the VAT your supplier charged you.
Maybe this will be clearer if I construct a totally different example. Imagine you purchase a tool for 100. Your supplier charges you 5% sales tax and sends an invoice for 105. (I call it sales tax to emphasize that it is not an offsetting tax like true VAT.) You enter the purchase price for the tool as 105 and apply no tax code. The sales tax is treated as part of the cost of the tool, the same way shipping costs would be if you purchased the tool over the internet.
Also imagine that local revenue includes income tax and, based on averages, assumes net income on the sale of tools is 10% of revenue. So withholding of 10% is required on tool sales, payable directly to the government. Notice that no relationship exists between the sales tax and income tax.
So you reduce the balance due to your supplier by withholding 10 (10% of the tool price) and remit that to the government. You pay 95 to your supplier. Your Tax payable account is never affected. From Manager’s standpoint, there have been no tax transactions. All you have done is effectively pay your supplier’s income tax in advance for them.
Now, if you want to know how much sales tax you have paid on purchases, you can separate the purchase price into two line items, one for the 100 tool and another for the 5 sales tax expense. But this will not show up in any of the tax reports. Those are designed for offsetting taxes like true VAT. Nor does the sales tax ever show up on your balance sheet, because it is never an asset or a liability. It was just an expense. This contrasts with VAT, which does show up in Accounts payable and Tax payable on the balance sheet because it involves amounts you owe to others.
As you have described your scenarios where no rebate (input VAT) is taken, they are like the sales tax in my example above.
If NBR Telecom mentioned is what I think it is, a telecom provider in Bangladesh, then it may be clearer. Bangladesh seems to operate a standard VAT but the purchaser of certain services has to remit the supplier’s VAT to the government rather than paying it to the supplier.
@Tut
All the time, you were right.
And I have learnt more about VAT & TAX calculatons.
I would like to thank you for your valuable time.
There is this new regulation in my country, some companies (some very big and listed companies) are given the right to “Withhold a portion of VAT”. So if they make a purchase of 100 (17.5% VAT). Total amount to be paid to Vendor is 117.5, a portion/percentage of the VAT amount (17.5) is withheld and paid to the tax authority for the Vendor (there is a percentage), this is different from the usual Withholding Tax which will also be deducted on the 100. Tax accounting is getting complex and complex. How can manager easily handle this situation?
This doesn’t seem too difficult, if I understand you correctly, @Abeiku. Assuming the 17.5% VAT is offsetting, like all true VAT, you would apply the 17.5% VAT tax code for Ghana. That posts to _Tax payable_Then you would add a negative line item for the VAT withholding amount, posted to a VAT withholding account so it does not affect the offset, because you still want to claim input VAT. (Remember, this is not your VAT collected; it is your supplier’s VAT collection, paid to the authority by you, but still offsetting your VAT collected from customers.)
The “normal” withholding should be added as another negative line item, posted to a different Withholding tax account, as you would have done previously. (This withholding might be for income tax or some other purpose.)
Each withholding line would need to be calculated separately on whatever base the law requires: prices or prices with VAT included. Here is where withholding on purchase invoices has an advantage over withholding on sales invoices. On sales invoices, only one withholding entry is possible. If you are required to inform a customer of both withholding amounts, you would either have to enter a composite rate/amount or add a negative withholding line. In this case, the withholding would have to posted to a specially created asset account
I had to laugh at your wording: “…some companies are given the right….” Yeah, given the right, as though they have a choice? When did any tax authority provide options? 
The way things are going, soon you’ll be paying the entire amount of a purchase invoice directly to the government, and the supplier will have to argue to get back its portion. 
Should have been “mandated” 
Agree with @Tut in definitions of VAT and Withholding Tax (which is not a tax but a collection strategy). Here are other things that might be good for Manager to have as used in the Philippines.
- Withholding tax is made when expense is recognized or paid, whichever comes first.
- There are Alphanumeric Tax Codes (ATC) for withholding taxes (same as VAT), because rates differe depending on the transaction.
- Withholding tax is also applicable at the Selling side (Withheld at Source) and commonly deducted to the final amount of tax to be remitted to the tax authority.
- There is also a withholding of VAT but this is a Final Tax in the Philippines, and standard input VAT is recognized and compared to actual VAT which is eventually adjusted.
- Looking forward to a feature to add customized printable forms to print certificate of taxes withheld.
Thanks.