How Does Withholding Tax Computations Work And Why Is It Relevant?

Compliance with withholding taxes like any other tax obligations is very crucial for any business. In doing so, you save yourself from the closure of operations, fines and penalties, imprisonment, tarnishing of your reputation, interference in business operations, among others.

In this article, we provide a highlight of what withholding taxes are, how to compute them and when and how to make payments for them.

Withholding Taxes Defined

Withholding taxes are amounts deducted at source (taken out before payments are made) from certain payments and paid to the tax authorities.  This means that not all amounts are subject to withholding taxes. Thus, there are exemptions. For instance, it must be ascertained that the value of the supply of goods, works or services as the case may be will exceed GHS 2, 000.00 in aggregate within a 12-month period.

Obligations for payment of tax 

The Income Tax Act 896 has mandated those making payments to others to withhold some amounts and remit the same to the relevant tax authorities. Such persons are called withholding agents whereas those for whom the payment will be made are called taxpayers. It is crucial to mention that withholding agents cannot be individuals.

Withholding tax certificates

Additionally, withholding agents are obliged to take documents called withholding tax certificates to be given to the taxpayers concerned within 30 days after payment. These certificates give evidence of payment made to the tax authorities on behalf of the taxpayer. They function like receipts.

Types of withholding taxes

There are broadly three types: those on goods, those on works and those on services. Withholding taxes are always expressed in percentages. 3%, 5%, and 7.5% are charged on goods, works, and services respectively. Thus, depending on the nature of the transaction involved, the applicable rate is computed on the contract amount and the amount so determined is paid to the tax authorities. For example, GHS250.00(5%* GHS5,000.00) will be paid as withholding tax for a painting contract of GHS5,000.00 since the transaction by nature is work.

Invoice amount to be VAT exclusive

It must be noted that if an invoice amount contains VAT (NHIL, GETFUND, and VAT itself), the total of these must be taken out of the contract amount before withholding tax is calculated. For instance, with a VAT inclusive contract amount of GHS2,362.50 and a total VAT of GHS362.50, the withholding tax must be calculated on the VAT exclusive amount of GHS2,000.00 (GHS2,362.50 – GHS362.50).

Time and Mode of Payment

All withholding taxes in a month must be paid by the 15th of the following month at the tax office where you registered for tax. You would have to use the withholding tax return as provided by the tax authorities and fill out the details. Also, fill out the pay-in-slip upon arrival at the tax office and add the amount to be paid whether cash or cheque and ask for directions to make payment.