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Tax Classification

Purpose

This page explain Tax Classification for Material and Customer in line with Sales related taxes in India. There are lots of ERP SD Forum threads where SD document an incorrect tax classification is determined for the customer or the material or Tax condition values are getting updated properly.

Overview

Tax Classification placed a major role in determining Tax Rate Determination in respective sales document through Condition Record. In Tax Classification you can have 2 kind of classification:

  1. Tax Classification for Customer
    This is maintained in Ship-to Party customer master for Shipping tab under Sales Area Data.

  2. Tax Classification for Material
    This is maintained in Material master's Sales: Sales Org1.

Based on Customer tax classification (maintained in the customer master) and Material tax classification (maintained in the material master), the appropriate tax code will be picked up. If both delivering plant and Customer Ship to party locations are within a state, VAT will be applicable. If both the locations are in different states, central sales tax (CST) will be applicable. Separate tax codes will be created for different percentage rate of CST / VAT. Since the tax procedure that is being used is TAXINN, all the taxes are maintained as conditions and these conditions are included in the pricing procedure. The GL accounts to which the tax amounts are posted are picked up from the tax code that is attached to the tax condition in the respective condition record.

Generally, for sales related domestic taxes determined based on:

  1. Region of plant
    This is determined from the region of the delivering plant

  2. Region of Customer
    This is determined from the region of the ship-to party

  3. Tax classification of the customer
    This is determined from respective customer master. Say,

    IndicatorDescription
    0No Exempt
    1Liable for Taxes
  4. Tax classification of the material
    This is determined from respective material master. Say, 

    IndicatorDescription
    0Tax Exempt
    1Taxable.

With above combination we can make out,

Tax Type

1

2

3

4

Tax rate

Region
of Plant

Region
of Customer

Tax Classification
of the
Customer

Tax Classification
of the
Material

VAT/LST

TN

TN

1

1

5.00%

CST

TN

KA

1

1

4.00%

 

In same way, for export we have

  1. Departure Country of plant
    This is determined from the country of the delivering plant

  2. Country of Customer
    This is determined from the country of the ship-to party

  3. Tax classification of the customer
    This is determined from respective customer master

  4. Tax classification of the material

    This is determined from respective material master.

For above combination, we will have

 

Tax Type

1

2

3

4

Tax rate

Country of
Plant

Country of
Customer

Tax Classification
of the
Customer

Tax Classification
of the
Material

Excise Duty

IN

IN

1

1

12.50%

Excise Duty

IN

US

0

1

0.00%

 

The tax classification of the customer determines whether the customer is fully, half or not liable for tax. Due to this classification, you can determine different tax rates. The tax classification is determined from the customer master for the partner, Ship-to Party. You can store a tax classification for each country/region and tax category or condition in the customer master. The system displays the countries provided in the customer master in the sales area data, billing area, from the plant assignment (plant region) for the distribution channel and division (transaction OVX6). You can change the automatically determined tax classification of the customer in the sales and distribution document header in the billing document area as an 'Alternative tax classification'.

The tax classification of the material determines whether the material is fully, half or not liable for tax. Due to this classification, you can determine different tax rates. The tax classification is determined from the material master and you can change it manually in the sales and distribution document at item level. The system displays the countries provided in the material master in the Sales and Distribution area: Sales organization, from the plant assignment (plant region) for the distribution channel and division. In this case, you can store a tax classification for each tax category or condition and country.

Customer
Tax Status

Material
Tax Status

Liable to
Pay Tax

Liable for Taxes

Taxable

Tax to be paid

Liable for Taxes

No Tax

No Tax to be paid

Tax Exempt

Taxable

No Tax to be paid

Tax Exempt

No Tax

No Tax to be paid

Tax Concession

Taxable

Tax to be paid Concession Rate

Tax Concession

No Tax

No Tax to be paid

There mostly 2 values for tax classification for material

Tax Classification
Code for
Material

Tax Classification
Description

0

Tax Exempt

1

Taxable

If the material is liable for taxes, then rate of tax will depend on the status of customer tax liability.

In addition, when we talk about Customer Tax Classification. Generally, the different classification for customer is based on types of concessional tax percentages. But the exact form for that tax classification is captured in this setting. This is because there need not always be a one to one correspondence between the tax classification and a form.

Tax Classification
Code of
Customer

Tax Classification
Description

0

Not Liable for Tax

1

Fully Liable for Tax

2

Form C

3

Form D

4

Form F

5

Form G

6

LST

Say, where, 

Customer Tax Status

0 - Tax Exempt

1 - Liable for Taxes

2 - Tax Concession

Material Tax Status

0 - No Tax

1 – Taxable

For domestic sales, inter-state and intra-state, we can have:

Tax Type

1

2

3

4

Tax Rate

Region of
Plant

Region of
Customer

Tax Classification
of the
Customer

Tax Classification
of the
Material

VAT/LST

TN

TN

1

1

5.00%

VAT/LST

TN

TN

1

0

0.00%

VAT/LST

TN

TN

2

1

3.00%

VAT/LST

TN

TN

2

0

0.00%

VAT/LST

TN

TN

0

1

0.00%

CST

TN

KA

1

1

4.00%

CST

TN

KA

1

0

0.00%

CST

TN

KA

2

1

2.00%

CST

TN

KA

2

0

0.00%

CST

TN

KA

0

1

0.00%

 

Similarly Excise Duty(ED) for export and domestic,

Tax Type

1

2

3

4

Tax rate

Country
of
Plant

Country
of
Customer

Tax Classification
of the
Customer

Tax Classification
of the
Material

ED

IN

IN

1

1

10.50%

ED

IN

IN

1

0

0.00%

ED

IN

US

0

1

0.00%

ED

IN

US

1

1

10.50%

ED

TN

KA

1

0

0.00%

ED

TN

KA

0

1

0.00%

 

Useful OSS Notes

 

SAP NoteDescription

872449

Tax determination in Sales and Distribution