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.

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10 Comments

  • Paul Kwabena Asiedu
    Posted December 1, 2019 4:10 am

    Great information. Keep up the good work of equipping business with the right knowledge to do good business.
    Please kindly publish an article on PAYE.
    Thanks

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  • Richard aidoo
    Posted February 2, 2020 5:30 pm

    Is the WHT on GHS 2,000.00 monthly or annually, if annually how do you withhold for the month. Please clarify

  • Isaac Opoku
    Posted February 4, 2020 5:51 pm

    Hello Richard,

    Thanks for patronizing and asking this question.

    The GHS2,000 is a given transaction amount. In order words, it is an example of a situation of a transaction where the contract amount (excluding VAT) is the GHS2000.

    Be reminded that there would be no tax to be withheld if this is the only transaction done with the supplier in question for the whole year. However, if the aggregate of transactions done with or to be done with a given supplier will exceed GHS2000 for a whole year, then tax must be withheld considering the nature of the transaction involved, that is, whether goods, work or service.

    I hope this clarifies. Thank you.

  • Ivan
    Posted June 11, 2020 2:26 pm

    Hi Isaac,

    Thanks for sharing all this information online. I have a doubt regarding Withholding VAT. Hope you can help me. For services I know the withholding VAT rate where applicable is 7%, but how is the amount calculated? Is it 7% on base amount excluding NHIL and GETFL or including levies?

    As an example consider the following invoice to a withholding agent:
    – Base amount: 200.00 GHS
    – NHIL: 5.00 GHS
    – GETFL: 5.00 GHS
    – VAT: 26.15 GHS
    Total invoice amount: 236.15 GHS

    What would be the WHVAT amount?
    a) 14.00 GHS (7% of base amount)
    or
    b) 14.70 GHS (7% of base amount + 7% of NHIL + 7% of GETFL)

    Thanks in advance and regards,

    • Isaac Opoku
      Posted June 11, 2020 6:29 pm

      Hello,

      Thank you for patronizing our blog. Please find my response to your question below:
      1. The law does not allow what is called “tax on tax”. On this premise, calculating VAT means that the base amount to be used should be VAT exclusive.
      2. in direct response, the withholding VAT should be computed on the sum of the base amount, NHIL and GETFUND.

      I trust these help.

      Best regards,
      Isaac.

  • John
    Posted June 18, 2021 11:51 am

    Hi Isaac
    Can you help me with the accounting entries for both WHT on sales invoices and purchase invoices.
    Thank you

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  • nana yaa
    Posted August 29, 2024 11:33 am

    i’m confused here. can you put a simple excel or a tabulated description here as template?

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