Activate extended withholding tax 

Step 1

SPRO 
Menu path
Accounting -> Financial Accounting -> Financial accounting global settings -> Extended withholding tax ->
India 
Activate Withholding Tax

Enable the Ext wtax functionality 

Create Withholding tax type 
Menu path
Accounting -> Financial Accounting -> Financial Accounting Global Settings ->
Extended withholding tax -> Calculation ->Witholding tax type -> 
Define withholding tax type  for Invoice posting 
And also Payment posting

Invoice posting for deduction during Liability creation 
Payment posting for Advance / Down payments 

Parameters for Withholding tax type 

Step 2

Maintain the above settings for Accumulation please tick on PER MONTH instead of Calendar year so that accumulation is carried out on a periodic basis for Contractors 

Similarly create for advance or downpayment 

Step 3 

Assign Ext withholding tax type to company code 
Menu path 
Accounting -> Financial Accounting -> Financial accounting global settings->
Extended withholding tax -> Co code -> Assign withholding tax type to co code
Assign all the Withholding tax types to the Co code 

Step 4 

Create Tax codes for Withholding tax 
Accounting -> Financial Accounting -> Financial accounting global settings ->
Extended withholding tax -> Withholding tax codes -> Define withholding tax codes 

Define accounts for withholding tax types 
Accounting -> Financial Accounting -> Financial accounting global settings ->
Postings 

Here you  assign the GL accounts for Tax type and Withholding tax code 

SAP FI

Read Also
How witholding taxes are paid in actual practice

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SAP Financial and Controlling Interview Questions, Certification and Configuration, Books

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