It is a system which involves the declaration of VAT by both the supplier and his customer who has been appointed as a withholding VAT agent. Institutions appointed as withholding VAT agents are Government institutions, parastatals, banks, financial institutions, co-operative societies, insurance companies, and regular exporters.
When a taxpayer (trader) supplies and invoices an appointed withholding VAT agent the payment for supply is made less VAT charged or that which ought to have been charged. The agent withholds VAT irrespective of whether the supplier is registered for VAT or not. The agent issues a withholding VAT certificate to the supplier indicating the VAT withheld. This certificate entitles the trader to claim back the withheld VAT to avoid double taxation since the same tax is declared and paid by the trader through a VAT 3 return. Withholding VAT on taxable supplies not charged VAT is computed using the formula X - X/1.16 where X is the total value of the invoice or taxable supplies.