Withholding tax on supplier payments: three numbers, not one
The entry looks simple and is routinely got wrong. Here is why a payment with withholding involves three separate figures.
2 min read
If you are required to deduct tax at source when paying suppliers — the norm across much of South Asia and the Gulf — then a single payment involves three different amounts, and the most common bookkeeping error in this area is using one number where three are needed.
The three numbers
- 1What settles the bill. The supplier is relieved of the full invoiced amount, because you have discharged the whole obligation — partly in cash, partly by remitting tax on their behalf.
- 2What leaves the bank. The cash figure only. This is what the bank statement will show and what a cheque, if you write one, is made out for.
- 3What is held as a liability. The difference, sitting in a withholding tax payable account until you remit it to the tax authority.
The entry
Take a bill of 100,000 with 10% withholding. The supplier is settled in full, 90,000 leaves the bank, and 10,000 becomes a liability:
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 100,000 | |
| Bank | 90,000 | |
| Withholding tax payable | 10,000 |
When you remit, the liability is cleared against the bank. Nothing touches the expense account at either point — the expense was recognised when the bill was raised, and withholding is a settlement mechanism, not a cost to you.
What goes wrong
Recording the payment as 90,000 against the bill
The supplier then shows a permanent 10,000 outstanding that neither of you thinks is owed. Your payables control account is overstated, the aging report shows a phantom balance in the 90-plus bucket forever, and someone eventually writes it off to a suspense account.
Recording the payment as 100,000 leaving the bank
The supplier is settled correctly and the bank is wrong by 10,000. This is the more dangerous of the two, because it does not show up in the payables subledger at all — it surfaces at the bank reconciliation, weeks later, as a difference nobody can trace.
Netting the withholding against the expense
Understates the cost and hides the liability entirely. The tax authority is still owed the money.
The cheque, if there is one
A cheque accompanying a payment with withholding is written for the cash figure — number two on the list — not the invoiced amount. Obvious in isolation, and routinely got wrong when the cheque is prepared from the invoice rather than from the payment.