Withholding Tax vs VAT: What’s the Difference?

What’s the Difference?

‍Withholding tax and VAT can both affect what gets paid on an invoice, but they work in very different ways. That difference matters because one is usually deducted from a payment before the seller receives it, while the other is added to the invoice as a tax on the sale.

Withholding tax is an amount the payer holds back and remits to the tax authority on behalf of the payee. VAT, or value-added tax, is a consumption tax added to goods or services and shown separately on the invoice.

Both involve tax, but they affect the invoice and payment flow in opposite ways. VAT usually increases the total the client sees on the invoice. Withholding tax usually reduces the amount the supplier actually receives.

How Withholding Tax Works

Withholding tax is usually applied when the payer is required by law to deduct a percentage from the payment and send it directly to the tax authority. The supplier or contractor does not receive that withheld amount in cash, but it is generally credited toward their tax obligations.

For example, if an invoice total is $1,000 and the withholding tax rate is 10%, the payer may send $900 to the supplier and remit $100 to the tax authority.

This matters because the invoice may show one total, but the amount actually received will be lower. Businesses need to keep track of that difference so their records match the payment and the tax credit.

How VAT Works

‍VAT is added to the invoice as a tax on the goods or services being sold. The supplier charges it to the client and then remits it to the tax authority, usually after offsetting eligible input VAT where allowed.

For example, if the service amount is $1,000 and VAT is 20%, the invoice shows $1,200 total. The client pays the full amount, and the supplier later accounts for the VAT portion.

VAT matters because it affects how the invoice is presented. Once a business is VAT registered, the invoice usually needs to show the VAT amount separately, along with the tax rate and VAT number where required.

Which One Changes the Invoice Total?

‍VAT changes the invoice total because it is added to the sale. Withholding tax usually does not work that way. Instead, it affects how much of that total is actually paid to the supplier.

That is why the two taxes create different accounting results.

With VAT, the invoice total usually goes up.
With withholding tax, the cash received may go down.

In some jurisdictions, both can apply to the same invoice, which makes it even more important to show the numbers properly.

Can the Same Invoice Include Both?

‍Yes. In some countries and industries, an invoice can include VAT while also being subject to withholding tax.

For example, a supplier may issue an invoice for:

Service amount: $1,000
VAT (20%): $200
Invoice total: $1,200

If withholding tax of 10% applies to the base service amount, the payer may withhold $100 and pay the supplier $1,100 instead of the full $1,200, while remitting the withheld amount separately.

That means the invoice total, tax shown, and cash received are not always the same number.

Practical Example

‍Imagine a consultant sends an invoice with:

Service fee: $2,000
VAT (15%): $300
Invoice total: $2,300

If the payer must withhold 5% on the service fee, they withhold $100 and send:

Payment to consultant: $2,200
Withholding tax remitted separately: $100

In this case:

• VAT increased the invoice total
• Withholding tax reduced the cash actually received

That is why the two terms should not be confused.

Final Take

‍VAT is added to the invoice as a tax on the sale. Withholding tax is deducted from the payment and remitted on the supplier’s behalf. One increases the invoice total, while the other can reduce the amount the supplier receives.