Tax Category
In ERPNext, you can make one or more Tax Rules applicable to transactions on a range of criteria using a Tax Category. If you want to tax the same thing differently based on who the supplier is, who the customer is, or what type of item it is, this is particularly useful.
You can create tax categories from Home → Accounting → Taxes → Tax Category.
1. Prerequisites
Prior to creating or using a tax category, make sure:
One or more tax rules are established (so they can be assigned to Tax Category).
The necessary charge and tax templates (for sales and purchases) are available.
If item-level tax setup is enabled, ensure that item tax templates are created.
2. How Do Tax Categories Work?
To add a Tax Category, click the Tax Categories list, click New, and enter the name.
Attach the Tax Category to one or more Tax Rules.
By billing or shipping, apply the tax category to the customer, supplier, or address.
During a transaction (e.g., purchase or sales invoice), ERPNext will:
Specify the tax category by address, party, or manual override.
Retrieve the applicable Tax Rule or Rules from the Tax Category.
Use those rules when applying the Taxes and Charges Template(s).
Ensure the Tax table is automatically recalculated.
In addition, if item tax templates exist and the option "Automatically add Taxes from Item Tax Template" is chosen, item tax templates can be utilized instead of or in addition to them, based on the setup.
3. Tax Category Assignment
In the transaction, the system will decide the Tax Category automatically using either the Party Address or Party Master (Customer/Supplier).
The following can be used for deciding a tax category:
- Customer: Set the tax category in the customer master.
- Supplier: Set the Tax Category in the Supplier master.
Address (shipping or billing):
Accounts Settings > Set Address Tax Category From (Billing or Shipping) is where you set the preferences.
The Party Address is initially validated by ERPNext. The Tax Category on the Party Master will be applied if not specified.
- Item: In some cases, item-level tax rules which are attached to the Tax Category are needed.
If required, you can also set the Tax Category manually in a transaction.
4. How a Transaction Is Affected by the Tax Category
ERPNext does the following automatically whenever a Tax Category is applied in a transaction:
Sets the item tax templates for every item that are related to that tax category.
Based on the Tax Rules, it fetches the concerned Sales Taxes and Charges Template or Purchase Taxes and Charges Template.
populates the document's Taxes table without requiring user intervention.