When using the withholding tax on purchases in the presence of value-added tax, the deduction is made on the total value after the tax, and this is illegal.
I hope to adjust it to the total before value added tax
Thank you
Manager applies withholding tax on the total of purchase amount plus VAT because that is the most common approach around the world. If your jurisdiction prohibits this, you must adjust the withholding rate entered into Manager to a lower percentage rate to compensate. Here is an example:
- Assume a purchase amount of 100.
- Apply VAT of 15%.
- Apply withholding of 5%.
Under Manager’s default approach, 5% withholding would be calculated on the sum of the purchase amount and VAT (115). So withholding would be 5.75.
But you want withholding to be only 5.00. So you would adjust the entered withholding rate to 4.348%. The formula for the adjusted percentage rate is:
R = 100 x W / (100 + V)
where R is the adjusted percentage rate, W is the nominal percentage withholding rate, and V is the percentage VAT rate. In the example:
R = 100 x 5 / (100 + 15) = 100 x (5 / 115 ) = 4.348%
Thanks for your interest
Calculating withholding tax based on the tax inclusive amount is not correct within the realm of accounting and taxation in my opinion.
Withholding tax primarily relates to Direct tax, specifically Income tax. In our country, we navigate two distinct withholding tax laws:
- Withholding VAT (related to the withholding of Indirect tax)
- Withholding Tax (focused on the withholding of Income tax)
@lubos @Tut @Afifi: There’s a bit of confusion with computing withholding tax on tax-inclusive amounts. While Manager offers a helpful feature allowing users to input the exact withheld amount, applying the rate directly to the tax-inclusive amount seems to have no purpose. This is due to the absence of a default account or method to separate and record the deducted VAT portion independently in the general ledger. It’s worth noting that VAT accounting requires dedicated accounts to track transactions affecting VAT in order to determine VAT liability. Interestingly, I haven’t come across instances where withholding taxes are applied to tax-inclusive amounts. If the two taxes apply, there must be two distinct sections for users to input data.
I expressed no position on whether the accounting was good or bad. I told the other user why Manager works as it does and presented a method to obtain the result desired. I also included an important “if.”