Below article will help you understand what configuration is needed in sap to fulfill actual withholding tax requirement as directed by tax authority.
Applicable withholding tax percentage depends upon the nature of withholding. In sap, each nature of withholding is represented as “withholding tax type”.
While defining withholding tax type, there are various controls which help us meet the actual withholding requirements as directed by tax authority.
Let’s take example to understand the control fields in withholding tax type
Example: Withholding on rent payment 194I
As per guidelines issued by tax authority, when payer makes payment of rent to residential then payer needs to withhold certain percentage of tax as per below:
Applicable withholding percentage needs to be applied on gross amount.
Apply WTH tax only when rent in the entire year crosses 1,80,000
No withholding to be applied till rent paid in the year is below 1,80,000
Below is how the above requirement can be met in sap:
Hence WTH tax base amount needs to be accumulated yearly with a limit of 1,80,000. Once accumulated base amount crosses 1,80,000 system should start calculating WTH tax.
Whenever payer is making payment to payee, payer is deducting WTH tax amount. Let’s suppose tax authority says that “in the entire year maximum of 3,00,000 from rent payment can be withheld.” Once accumulated WTH tax amount exceeds 3,00,000 no further withholding tax should be applied.
This requirement can be fulfilled in sap by using the field “accumulate WTH tax to maximum” and setting maximum limit of WTH tax to 3,00,000
Withholding tax code
The WTH tax percentage that has to be applied is stored in WTH tax code.
WTH tax code defines what WTH tax percentage is to be applied on what portion of WTH tax base.
Official withholding tax key is also maintained in WTH tax code.
In India, each nature of withholding is assigned an official WTH tax key. For example, withholding from payment to contractor (residential) is assigned key 194C while withholding from rent payment to residential is assigned key 194I.
This key is issues by tax authority. Tax authority demand that tax reports (while filing tax returns) should have official withholding tax key against withholding tax information.
WTH key is just for the purpose of reporting.
Let’s put above concepts together and try to understand configuration needed for withholding tax in sap
- WTH tax type is created: WTH tax type represents nature of withholding tax e.g. withholding on rent, withholding on payment to contractor etc. It has got control fields which control the way withholding is applied.
- WTH tax key might be created: Few countries require that tax reports should have official WTH tax key along with WTH tax details.
- WTH tax code is created: WTH tax code captures the WTH tax percentage that is to be applied on base amount.
How GL account for posting withholding tax amount is picked automatically.
GL account for posting WTH tax amount can be picked on the basis of WTH tax code or WTH tax type or a combination of WTH tax type and WTH tax code.
Combination of WTH tax type & WTH tax code is assigned GL account for posting WTH tax amount.
Vendor details relevant for withholding tax is maintained in vendor master
Below information which is relevant for withholding is maintained in vendor master:
→Applicable withholding tax type & tax code
→If vendor is liable for withholding tax or not? Some vendors may not be liable for WTH tax.
→Vendor belongs to which recipient type? Applicable WTH tax code depends upon vendor recipient type also. Vendor is company or not plays role in deciding applicable WTH tax code.
→Vendor exemption details: Vendor may be exempted from certain percentage of WTH tax.
→Exemption certificate number if any: If vendor is exempted then vendor must have received an exemption certificate number.
→Validity dates of exemption certificate: Exemption valid from date and exemption valid to date