Understanding Withholding Tax

Start Here 7 min read Updated June 2026

Withholding tax (WHT) — called TDS in India, IRRF in Brazil — works the opposite way to sales tax. Instead of adding to an invoice, it reduces a payment: the payer keeps back a slice of what it owes and sends that slice directly to the tax authority on the payee’s behalf.

Getting there. Withholding rules and rates are set up in the REDA Financials Admin app — App Launcher (the grid icon at the top-left of any page) → Withholding Tax Rules tab. Purchase-side WHT is then applied automatically on bills you enter under the Purchase Invoices tab in the day-to-day REDA Financials AI app; sales-side WHT is recorded on a Cash Receipts receipt there.
Access you'll need. Any REDA Financials AI permission set can view withholding rules, bills, and receipts. Setting up the rules requires Accounting Admin v2 or Accounting Controller v2; entering and posting the bills that withhold requires Accounts Payable v2 (or Accounting Admin v2), and recording sales-side WHT receipts requires Accounts Receivable v2 (or Accounting Admin v2).

The mechanism in one line. You owe a vendor £100,000. WHT of 2% applies. You pay the vendor £98,000 and remit £2,000 to the tax authority. The vendor still gets full credit for £100,000 — £2,000 of it just went to the government via you.

How it differs from sales tax

	Sales / value-added tax	Withholding tax
Effect	Adds to the invoice total	Reduces the payment
Who acts	Seller charges it	Payer withholds it
When computed	Previewed as you edit; stored at posting	Previewed as you edit; stored at posting (purchase bills)
Engine	The tax engine	A separate, parallel WHT engine

WHT shares REDA’s data-driven philosophy — rules and rates as records, no code — but it’s its own engine, with its own rules, because it behaves so differently.

Two directions

WHT can flow either way, and REDA handles each differently:

Direction	Who withholds	How REDA handles it
Purchase WHT	You withhold from a vendor payment	Calculated automatically by the rule engine — previewed on the bill, stored when the bill posts; you remit the withheld amount
Sales WHT	Your customer withholds from paying you	No rule engine — recorded manually when the customer’s WHT certificate arrives, via a Cash Receipt of type WHT Received

Purchase-side is the common case. Most WHT you’ll configure is purchase-side — you withholding tax on payments to contractors, professionals, landlords, or non-residents. The engine calculates it on the bill so you can see the net payable before you post. Sales-side is different in shape — you don’t know the exact amount until your customer issues a certificate — so it’s recorded at cash time. Each has its own article.

The same engine, many regimes

Country	Withholding	Examples
🇮🇳 India	TDS	194C contractors, 194J professional (10%) & technical (2%) fees, 194I rent, 194H commission
🇧🇷 Brazil	IRRF & PCC	Income WHT on services (1.5%); PCC contributions PIS, COFINS & CSLL, gated by your tax regime
🇬🇧 United Kingdom	Limited	20% on interest (ITA 2007 s.874) and royalties (s.903) to non-residents
🇺🇸 United States	Backup WHT	24% on vendors without a valid TIN

Notice the range: the UK barely uses WHT (a couple of non-resident cases), while India and Brazil lean on it heavily. The seed packs carry each country’s rules — you turn it on where you need it.

The pieces

Object	Role
WHT Rule	When WHT applies — section, scope, threshold, direction
WHT Rate	The percentage(s) — a rule can have several
WHT Transaction	The audit record of a withheld amount (purchase side)
Account & Entity fields	Who withholds, who’s exempt, the default GL accounts, and the master on/off switch

When the numbers become real

While you are editing a bill, the engine gives you a live preview of the withholding — the same math it will use later, with nothing written to the books yet. The stored amounts — the WHT Transaction records, the line’s Withholding Tax Amount, and the accounting entries — are created when the bill posts. The form even says so: the on-screen hint reads “Withholding Tax computed at save/post time.”

That timing has a practical upside: the rates and thresholds that count are the ones in force on the date the bill posts against, not the ones from the day you started drafting. And if you later unpost the bill, the withholding records are removed along with the tax records and accounting entries — the next post recalculates everything fresh.

Where the money sits in your books

Each direction has one home account, set once on the Entity:

Direction	Entity field	What accumulates there
Purchase	Default WHT Payable	A liability: tax you kept back from vendors and still owe the authority. Posting a bill credits it; your remittance clears it.
Sales	Default WHT Receivable	An asset: tax customers remitted on your behalf, evidenced by their certificates. You claim it against your own tax liability.

On the purchase side the credit always goes to the entity’s Default WHT Payable account — the per-rate detail (which section, which rate, which line) lives in the WHT Transaction records, which is where filings are built from.

Turning it on

Three things switch purchase-side WHT on for a vendor:

Enable it on the Entity. The master switch WHT Enabled (Purchase) must be on, and a Default WHT Payable account set — posting a bill with withholding stops with a clear message if the account is missing.

Assign a rule to the vendor. Set the vendor Account’s default WHT rule (e.g. India 194C). A bill line can override it for mixed bills.

Classify the vendor. Their taxpayer ID and classification (company / individual / non-resident) pick the right rate — and a missing taxpayer ID can trigger a special, usually higher, “No Tax ID” rate.

From there it’s automatic: enter a bill, and the engine computes the WHT and shows you the net payable. The details are in Purchase-Side WHT.

Sales-side WHT needs its own two switches on the Entity — WHT Enabled (Sales) and a Default WHT Receivable account — but no rules: the amount comes from the customer’s certificate, entered by hand on a WHT Received cash receipt. See Sales-Side WHT.

Common mistakes to avoid

Mistake	Why it hurts	Do this instead
Paying the vendor the invoice total instead of the net	You’ve paid the withheld slice twice — once to the vendor, once to the authority	Pay the balance due REDA shows: it is already net of withholding
Reducing the expense by the WHT	The cost of the service hasn’t changed — only who receives the money	Book the full expense; the withholding is a split of the payment, handled automatically at posting
Expecting WHT on a sales invoice	There are deliberately no WHT fields on sales invoices — you can’t know the customer’s withholding in advance	Invoice in full; record the certificate later via a WHT Received cash receipt
Leaving a vendor’s taxpayer ID blank	Rules can carry a penal “No Tax ID” rate — the vendor is legally over-withheld	Complete the vendor’s tax identity before their first bill
Treating a zero-WHT bill as a bug	Thresholds, exemptions, and scopes legitimately switch withholding off per line	Walk the gates in Purchase-Side WHT before changing configuration

Where to go next

WHT Rules & Rates — the rules and rates that drive WHT.
Purchase-Side WHT (TDS on Bills) — the common vendor-payment case.
Sales-Side WHT (via Cash Receipt) — when your customer withholds.
WHT Transactions & Reporting — the audit and reporting records.
WHT Exemptions — vendors excluded from withholding.

Frequently asked questions

Yes — TDS (India), IRRF (Brazil), and backup withholding (US) are all withholding tax: the payer deducts at source and remits to the authority. REDA handles them all through the one WHT engine.

No — it reduces the payment. The invoice total is unchanged; the vendor simply receives less cash, with the withheld portion going to the tax authority. That’s the fundamental difference from sales tax.

You see a live preview while editing the bill — so the net payable is visible before you commit anything. The amounts are stored when the bill posts: that’s when the WHT Transaction records, the line amounts, and the ledger entries are written. Unposting removes them; re-posting recalculates.

That’s sales-side WHT. You post the invoice in full, then record the withheld portion when the customer’s WHT certificate arrives, via a Cash Receipt. See Sales-Side WHT.

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