Withholding tax is the basically a tax withheld during the Vendor payment. So when making the payment to vendor the amount will be deduct (i.e withheld tax)
from the invoice and paid. The customer is actually the tax to tax authorities.
you can visit for more info.
<a href="http://help.sap.com/saphelp_47x200/helpdata/en/af/03813a88d3eb66e10000000a11405a/frameset.htm">Withholding Tax</a>
For the config steps you go to the IMG path FI > Financila accounting for the Global settings > Withholding Tax
Withholding tax configuration is done by FI person.
hope this helps
total EWT configuration part is belongs to FI, but incase he doesnt know the vendor who is the contractor category, then you may assign the tax codes and types to the vendor/contractor. or fi person also will do the same if he knew who is under contractor or sub contractor in vendor.