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Tax Calculations

Overview

Many countries and states have varying methods for the calculation of ad-valorem taxes on sales. There is some flexibility in the configuration of how these automatic calculations are made and to which general ledger accounts the postings are made to. If all else fails tax rates can be entered by line of the invoice or credit as necessary. Several different rates of tax can be applied to each line item individually and some rates can compound on top of previous taxes calculated. The automatic calculation of taxes works based on:

  1. Where the branch is that is to invoiced - each branch is defined as belonging to a certain tax group. It is the tax group that determines the taxes that will apply to the sale.
  2. What the item being invoiced is - e.g. In many states reduced rates of taxes apply to the more essential items for basic sustenance. - each item is defined as belonging to a certain "tax category"
  3. From where the item is dispatched i.e. the warehouse from which the goods are picked. The tax legislation in most countries require that supplies made within the country attract tax - GST/VAT or whatever. The inventory location from where the goods or service is being provided has a tax province it is the tax province of the inventory location in conjunction with the tax group of the customer branch and the tax category of the item that determines the rates of tax applicable.
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Setting up Taxes

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Single Tax on Sales within one Tax Authority Example - 2 Tax Categories:

In most tax authorities there are just two rates of tax 0% and some other rate lets say 10%. Sales to export customers will not be taxable as they are exempt. If the business simply operates in the one country, then things are very simple. Items that are zero rated have the stock master record modified to give them a tax category - for zero rated. All other taxable items have the default tax category - taxable supply. Two Tax Authorities are defined, the first the country in which it operates and the other called Export. A tax group is defined for export and one for Local Sales. Customer branch records must be set with the Tax Group of the Local Sales or Export. The location record of each of the warehouses is defined as being the country tax authority. Now the rates applicable to export tax authority will all be 0 for tax categories - Taxable Supply and Export. The rate of tax applicable to the country tax authority will be 10% for taxable supply and 0% for Zero Rated.

Sales only within one Tax Authority Example - 3 Tax Levels:

Maybe zero-rated for food and 5% on clothing and 10% on all other goods. The tax category of all food items should be set to say Zero Rated and the tax rate of all clothing items set to - Clothing - all other taxable items at the full rate set to a tax level of Taxable Supply. The tax rates for the country tax authority for taxable supply set to 10%, Zero Rated - 0% and Clothing - 3 5%.

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Sales Within Two Tax Authorities Example - 3 Tax Levels:

The business has a warehouse in another country - (Tax Authority A) or state with a different revenue collection authority and one authority has two levels and the other has 3 levels (Tax Authority B) as in the two examples above. Rates need to be defined for deliveries from each warehouse to customer branches in each tax authority. In most cases the rate of tax applicable to exports will be 0% - exempt. Tax Authority A will have entries applicable to deliveries within Tax Authority A for each of the 3 tax levels (even though only 2 are applicable - the rate for level 3 will be the same as 1) and also for deliveries to Tax Authority B. Tax Authority B will have rates set up for each level for deliveries within Tax Authority B and also for deliveries to Tax Authority A - the later rates will most likely be 0%.

The logic used in determining the rate to be used is as follows:

The TaxAuthority of the warehouse the goods are delivered from, the TaxLevel of the item and the Tax Authority of the branch of the customer being delivered to are determined. Using all three of these factors the rate is returned from the TaxAuthLevels table.

General ledger posting relating to the taxes calculated are made in accordance with the codes set up in the Tax Authority table.

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Tax Category Maintenance

In this script, you can enter, edit or delete a tax category name. A tax category is required for each category of items that attracts different rates of tax because in some authorities childrens clothing and basic food items are not subject to tax. Similarly luxury items might attract higher rates of tax.

You can enter any tax category name. But there are three special tax category names:

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