Sales Tax Overview

  • Article

Commodities that are produced or imported and sold for the first time incur sales tax. These commodities, if sold subsequently without additional processing, do not incur sales tax.

The sales tax is collected by the seller of the taxable goods, although it is usually recovered by the seller from the purchaser. Sales tax is administered by the tax authorities through the state sales tax acts. Each state has its own sales tax classification and administration procedure. The tax that is levied on sales transactions within an individual state is dictated by local tax requirements, and can include multiple taxation categories. Central sales tax, which incorporates other tax rates and regulations, is applied to goods that involve interstate movement. The central sales tax is administered by the state tax authorities.

Sales Tax Components

In Microsoft Dynamics NAV, to use sales tax, you must set up the following prerequisites:

  • The sales tax forms that are applicable for different states. Sales tax forms are required for charging lower tax rates. These forms can also be used as transit documents for movement of goods into the state.

  • The state codes to be linked to each vendor or customer card.

    Note

    After linking the state codes, you must generate form numbers using form number series.

  • The transit documents, which are state forms that are given to vendors during material transit. You can generate transit document number series and forms.

  • The sales tax rates defined for a group of items. You must define sales tax groups, based on which the tax rate differs for a particular item. This tax group can be linked to the item on the item card.

  • The tax jurisdictions, which are applicable according to tax authority regulations. The taxes defined may be for transactions within a state or between states.

  • The effective tax rates for an item group. You can select the combination of tax jurisdictions and tax groups for which rates are prescribed.

  • The tax area for taxes within a state or between states. When more than one authority taxes for a given location, you can combine the different taxes into a tax area.

  • The tax area locations to define tax area codes. These are applicable based on the combination of the dispatch or receiving locations and the customer or vendor states. Tax area is applicable during transactions with the customer or vendor, and are standard for sales and purchase transactions.

For more information, see How to: Set Up Indian Sales Tax and How to: Set Up Sales Tax for Purchase and Sales Transactions.

Calculation of Sales Tax for Purchase Transactions

During a purchase transaction, the sales tax rate and the tax area code for a selected item in the purchase order is displayed based on the combination of the vendor state and the tax group for the item. The sales tax amount is based on the rates specified in the Tax Details window, the taxes for the given tax area, and the order structure. If the tax is charged by a vendor at a concessional rate, you can select the form code and form number in the purchase order. The form number appears in the purchase order. For more information, see How to: Set Up Sales Tax for Purchase and Sales Transactions.

Note

Purchase return transactions reverse the process for purchase transactions. However, the calculations for sales tax for purchase return transactions are similar to those for purchase transactions.

Calculation of Sales Tax for Sales Transactions

The calculation of sales tax for a sales transaction is similar to the calculation of sales tax for a purchase transaction. Tax rates appear based on the customer state and the shipping location for the company. For more information, see How to: Set Up Sales Tax for Purchase and Sales Transactions.

Note

Sales return transactions reverse the process for sales transactions. However, the calculations for sales tax for sales return transactions are similar to those for sales transactions.

Calculation of Sales Tax to the Government Authority

You can pay sales tax to the government using the payment journal. The payment journal lists all sales transactions for which sales tax payments are to be made. The sales tax entries can be filtered based on the payment period or based on other user requirements. For more information, see How to: Make Sales Tax Payments.

See Also

Tasks

How to: Set Up Indian Sales Tax
How to: Set Up Sales Tax for Purchase and Sales Transactions
How to: Make Sales Tax Payments
How to: Print Central Sales Tax Reports