Answer:
Withholding tax is nothing but you collecting the tax on behalf of the Vendor and giving the Vendor an advance tax certification. Later on you will need to pay the tax that you collected.
What is a withholding tax?
Withholding tax is an Income
tax which is deducted at the source of the revenue. The party that
is subject to tax does not remit the withholding tax to
the tax authorities himself.
In any business transaction there
are 2 parties involved. One is the customer and another is the vendor.
A customer is authorized to deduct withholding tax for services rendered
by the vendor. When the vendor raises the invoice on the customer, the
customer deducts the withholding tax as per the rates
specified by the tax authorities
and pays the balance money to the vendor.
The tax deducted by the vendor is remitted to the tax authorities on specified due dates. The vendor gives a Withholding tax certificate to the customer for the withholding tax deducted. The customer can claim this withholding tax (as advance income tax paid) in his annual returns to Income tax authorities.
In some countries (like India) the withholding tax is deducted on Invoice or payment whichever is earlier. Thus when an advance is paid to the vendor the customer is required to deduct withholding tax o n the advance payment.
When the Vendor submits an Invoice the customer is now required to deduct tax on the Invoice amount reduced by the advance amount.
To calculate pay and report the
withholding tax, the SAP system provides two functions:-
- Classic Withholding tax
- Extended Withholding tax
Following Steps will help in Config. Withholding Tax:-
Check withholding tax countries
Define withholding tax type for invoice posting
Define withholding tax type for payment posting
Define withholding tax codes
Formulas for calculating withholding
Assign withholding tax type to company codes
Activate withholding tax
Create GL account and Automatic postings
Assigning W/tax types to vendor master
