TAXATION

TAX:
Tax is calculated from Expenses or Revenues, which is a Base amount. A base amount may include cash discount or not. If it includes it is a net base amount otherwise it is gross amount. It varies from country to country. Set the indicator in basic settings of taxes on Sales/Purchase, whether to include cash discount or not. We can use SAP system to manage various types of Tax according to the Legal requirements of a country or region. Tax Calculation SAP system calculates Tax amounts with or without cash discount or other deductions. Tax Posting The system posts the tax amount to define tax amounts. Tax Adjustments The system corrects tax amounts, in the case of cash discount or other deductions. Taxes consist of 1. Direct Tax 2. Indirect Tax Direct Tax: Direct Taxation is defined as the tax which is directly levied on the citizens of a country. All individuals and business concerns have to pay direct taxes to the government on a regular basis. These direct taxes are calculated on every source of income that accrues to the business of individual. Indirect Tax: Indirect taxes are the charges that are levied on goods and services. Some of the significant indirect taxes include VAT (Value Added Tax), sales tax, excise tax, stamp duties and expenditure tax. Indirect taxes: Examples 1. Excise Tax: It is an indirect tax levied on the sale of a specific good. It is a vital source of revenue for the Government of India. 2. Stamp duty: This is an additional charge levied on documents, like promissory notes, bills of exchange, insurance policies and debentures. 3. Sales tax: It is an indirect tax levied by the government at the point of sale on retail goods and services. Sales tax is collected by the retailer, which ultimately forwarded to the state of India. Sales tax is regarded as one of the vital sources of revenue to the states of India. In India, each state has its own sales tax act.

4.

Expenditure tax: This indirect tax is enforced under the Expenditure Tax Act, 1987. The hotels in India collect expenditure tax from their customers and eventually deposit to the Central Government.

VAT (Value Add Tax)

Input and Output taxes are from Value Added Tax (VAT). Example of VAT: When a company that is registered for value added tax (VAT) buys goods or services from another supplier, VAT is charged and is currently 17.5% of the purchase cost. This is known as input tax. Similarly, when the company sells its own goods or services it charges its customers VAT at the same rate. This is output tax. Once a quarter, the company has to complete a VAT return, giving details of its input tax and output tax. The difference between output tax and input tax is payable to Tax Authority (HM Revenue & Customs). If input tax is greater than output tax the company can claim back money from Tax Authority. Output Tax: Output tax is calculated using the net price of products and is charged to the customer. Input Tax: Input tax is calculated using the net invoice amount and is charged by the vendor. Tax on Sales and Purchases (Output & Input Tax / VAT) Tax is calculated from Expense or Revenue items, which is a base amount. To determine the tax amount, the system calculates a base amount. A base amount may include cash discount or not. If it includes it is a net base amount otherwise it is gross amount. Base amount and Cash discount: The tax amount that you input when entering an invoice is checked by the system when the invoice is posted. Alternatively, we can have the system calculate the tax amount automatically. The tax amount is usually calculated from the expense or revenue item, which is the tax base amount. The composition of the base amount varies from country to country. The base amount can (but does not have to) include the cash discount amount. Entries: 1. Input Tax is occurred when purchasing goods or service, transaction will be as follow: Dr. Expense / Inventory acc Dr. Input Tax (Receive from government) (Paid to vendor as tax) Cr. AP (Vendor) 2. Output Tax is occurred when sale goods or service, transaction will be as follow: Dr. AR (Customer) Cr.Revenue Cr.Output Tax (Pay to government)
2

What is the difference between input and output tax? Input Tax is receivable account but Output Tax is liability account. At month-end, Input tax is offset with output tax and balance has to pay/receive the government. The Accounts receivable, Account payable and G/L application components supports the calculation and posting of Tax as follows: 1. The tax amount can be determined upon request 2. The tax amount is checked by the system at document level 3. The tax amount is posted to the tax accounts automatically 4. A tax adjustment can be performed automatically, if required for cash discount postings and other deductions. The following specification need to be made: 1. To determine the tax amount, the system calculates a base amount, the composition of which varies from country to country. We determine whether the base amount for tax calculation is to include or not include the specified cash discount amount. This information must be defined for each company code in the basic settings. 2. To enter and determine taxes automatically, a tax code is required, which will include the tax rate prescribed by the law. 3. The tax amount is generally posted automatically, For posting, specify the tax amounts (G/L)to which the individual taxes are to be posted. 4. In a G/L account master record, we can specify whether the account is a tax account, and if so, which Tax type (Input tax or Output tax). Input Tax: Excise duty paid CESS Paid (Center for Economic and Social Studies). VAT Paid (Value Added Tax) CST Paid (Central Service Tax) Output Tax: Excise duty Payable CESS Payable (Center for Economic and Social Studies). VAT Payable (Value Added Tax) CST Payable (Central Service Tax)

Steps for Customization of VAT

1. Define Condition type Calculation procedure groups several tax types together into a condition type (prices, taxes, discounts, surcharges, freight etc).
3

Control Data for Condition Type 1. Access sequences 2. Condition Class 3. Calculation type 4. Condition Category Access sequences An access sequences is a search strategy that the system uses to find data for a particular condition type. It determines the sequence in which the system searches for data. The accesses tell the system where to look first, second and so on, until it finds a valid condition record. Condition Class This is preliminary structure of condition types. It determines whether condition type is Discount or surcharge, Taxes, Prices etc. Calculation Type Determines how the system calculates prices, discounts or surcharges etc, in a condition. Condition Category A classification of conditions according to pre-defined categories (Ex: all conditions that relate to freight costs). 2. Check and Change Settings for Tax Processing In this activity we make the necessary specifications for posting taxes. In doing this we specify under a process key the following indicators: 1. Tax type Output tax, input tax, additional taxes, or "not tax-relevant" can be specified as the tax type. 2. Non deductibility of tax amounts For this, tax amounts are marked as not deductible. 3. Posting indicator Here you specify whether the tax amount is posted separately or distributed to expense or revenue items. 3. Define Procedure A Calculation Procedure is defined for each country, each containing the specifications required to calculate and post tax on sales/purchases. Each calculation procedure contains several tax types, which are called condition types in the Procedure. System defaults condition types when we define a Tax code. 4. Assign Country to Calculation Procedure Here we assign Calculation Procedure to the Country. 5. Define Tax Codes for Sales and Purchases Here we define Tax Codes. Tax codes are used to Check the tax on Sales/Purchases in the document Calculate the amount of tax on Sales/Purchases automatically on request.
4

Calculate the Non-deductable input tax portion Determine the tax account.

6. Create relevant G/L accounts Here we create G/L accounts for tax postings. 7. Define Tax Accounts In this activity, we specify the accounts to which the different tax types are to be posted. The system determines these accounts for automatic postings. 8. Assign Tax Codes for Non-Taxable Transaction In this activity we define an incoming and outgoing tax code for each company code, to be used for posting non-taxable transactions to tax-relevant accounts. Transactions posted like this are, for example; goods issue delivery, goods movement, goods receipt purchase order, goods receipt production order, order accounting.

Withholding Tax
The Tax that is charged at the beginning of the payment flow. The party that is subject to tax does not pay the withholding tax over to the tax authorities but other parties (Trading partner) pay the WHT on behalf of the first party. When a customer that is authorized to deduct withholding tax pays invoices from a vendor subject to withholding tax, the customer reduces the payment amount by the withholding tax proportion. The customer then pays the tax withheld directly to the appropriate tax authorities. Note: Country version India (CIN) is known as TDS (Tax deducted at source) is same as WHT. CIN complements the generic Classic Withholding Tax and Extended Withholding Tax solutions with additional functions that meet the needs of the Income Tax Act. Extended Withholding Tax: With extended withholding tax, we can process withholding tax from both the vendor and customer view. Example: 1. In Account Payable, the vendor is the person subject to tax, and the company code is obligated to deduct withholding tax and pay this over to the tax authorities on the vendors behalf. 2. In Account Receivable, the company code itself is subject to tax, and the customers that do business with this company code deduct withholding tax and pay this over to the tax authorities on the companys behalf.
5

Withholding tax is calculated and posted to the appropriate withholding tax accounts at different stages, depending on the legal requirements in each country. As a rule, withholding tax is posted at the same time that the payment is posted ie, Outgoing payment (AP) or Incoming payment (AR), is reduced by the withholding tax amount. The key concept in extended withholding tax is the distinction between withholding tax type and withholding tax code. Withholding Tax Type: Withholding Tax type represents basic calculation rules and various withholding taxes in a country. We must enter the withholding tax type in the customer/vendor withholding tax master data and in the company code master data. The system recognizes two categories of withholding tax type depending on when the withholding tax amounts are posted: Posting with invoice Posting with payment Withholding Tax Code: Withholding Tax codes specify features of calculation rules in particular the percentage rate. Day to Day Activities with Withholding Tax: We are required to calculate taxes either when we enter invoice or when we make payment, whichever comes first. When we enter a vendor invoice or make a down payment that is liable to withholding tax, the system automatically creates line items for the appropriate taxes, including surcharges. Since different taxes need to be remitted on different dates, depending on the section of the Income Tax Act, the system also calculates and records each line items due date. If we first make a down payment (and withholding tax on it) and then enter the vendor invoice later on. We have to clear the invoice against the down payment so that we do not withhold tax on the same item twice. As far as receivables are concerned, we also enter withholding tax certificates sent to us by our customers, as proof of tax that they have withheld on payment to us. Withholding Tax Keys: SAP uses withholding tax codes to represent the different sorts of withholding taxes and different tax rates. To each withholding tax code, you can assign the official withholding tax key prescribed by the tax authorities, which makes it easier for you to prepare a tax return.
6

National tax authorities use withholding tax keys to identify the different withholding tax types, you can define these official names for your tax codes.

Customization of WHT
1. Check Withholding Tax Countries The withholding tax country is needed for printing the withholding tax form. Since the list of country IDs prescribed by law is different from the list in the system, you have to define the withholding tax countries again. 2. Define Withholding Tax Type In one business transaction several kinds of withholding tax may have to be included / withheld. The SAP system uses withholding tax types to reflect this. Several withholding tax types can be defined in the system; one or more can be assigned in the Vendor master record. As far as the time of posting for withholding tax amounts is concerned, there are two different categories of withholding tax types 1. Withholding tax type for Posting at time of Invoice. 2. Withholding tax type for Posting at time of Payment. 3. Define WHT Type for Invoice Posting In this activity you define the withholding tax type for the posting at the time of entering an invoice. This withholding tax type does not have any effect on the payment. 4. Define Withholding Tax Keys SAP uses withholding tax codes to represent the different sorts of withholding taxes and different tax rates. To each withholding tax code, we can assign the official withholding tax key prescribed by the tax authorities, which makes it easier for you to prepare a tax return. 5. Check Recipients Types In this activity, we classify payment recipients as legal persons or natural persons, for the purpose of withholding tax reporting. Ex: Recipient Type Type CO Companies OT Others 6. Check Income Types We use the revenue type to classify (foreign) vendors by revenue. We need the revenue types as a specification for the withholding tax report.
7

7. Define Section Codes In this IMG activity, we define the section codes that are covered by your enterprise. You create one section code for every permutation of local tax office and the district tax office that you report to. Activities For each section code, enter a name, the district tax office, and the local tax office. If a section code represents a single business place, enter the business place as well. 8. Define Business Place An organizational unit below company code level that is primarily used for reporting taxes on sales/purchases. Create a business place for each tax deduction account number (TAN) that the company has. In the address data (which is printed on the vendor withholding tax certificates) maintain the tax office's address. 9. Assign Factory Calendars to Business Places In this Activity, we effectively specify which days the Tax offices that we work with are open. The system uses this information when we post a vendor invoice, so that it can allow for public holidays when it determines the tax due date. This activity is optional. 10. Maintain Tax Due Dates In this activity, we maintain the various tax due dates, because due dates can differ, depending on the withholding tax type and recipient types, we can maintain the dates at this level. Make sure that you maintain entries for all the recipient types that we use. Note: Specifies how many days you have to remit this tax, after you have posted it. If you have to remit the tax seven days from the month end, enter 777. Otherwise, enter the number of days after which you have to remit the tax to the tax office. 11. Define WHT Codes In this activity we define WHT Codes. We define the tax base and rate in the WHT code. We make the settings for each country and withholding tax type. We can define as many WHT codes as required for each WHT type. 12. Portray Dependencies Between WHT Types In this activity we can represent dependencies between withholding tax categories. Example: 1. N3 (WHT Type) W/TAX of Education Cess on TDS and this is calculate on TDS (1). 2. N4 (WHT Type) - W/TAX Education Cess on Surcharge and this should calculate on Surcharge (2)

3. N5 (WHT Type) W/TAX Higher Education Cess on TDS and that should calculate on TDS (1) 4. N6 (WHT Type) W/TAX Higher Education Cess on Surcharge and should calculate on Surcharge (2). 13. Define Min/Max Amounts for Withholding Tax Codes In this activity you define minimum and maximum amounts for withholding tax types. If the legal requirements permit Minimun, Maximum or exempt amounts for the WHT base amount or the WHT amount, we can define these settings here. 14. Assign WHT Types to Company Codes In this activity you assign withholding tax categories to company codes. 15. Activate Extended Withholding Tax In this activity you activate extended withholding tax. Extended withholding tax provides the following additional features: Multiple withholding taxes per customer or vendor line item. Withholding tax calculation for partial payments. 16. Define Accounts for Withholding Tax to be Paid Over (Maintain FI Configuration: Automatic Posting- GL Accounts) In this activity we define GL accounts for WHT to be paid/ transfer. 17. Specify Document Type (Account Payable) In this IMG activity, you specify which document type the system uses when you create a remittance challan for tax that you have withheld from vendors. This document transfers the tax from the withholding tax payable account to the bank account that you want to transfer the tax from. Note: Remittance Challan: A document, in india that we present to a bank when depositing any form of WHT that we have retained. The challan states that how much tax is being deposited. A separate challan is required for each form of WHT. 18. Maintain Number Groups In this activity, we set up the numbering for the remittance challans. We must create one challan for the taxes in each section of Income tax law (official WHT Keys) and for separate tax offices (Business Place), we must create different number range objects for each permutation of Official WHT Key and Business place. 19. Assign Number Ranges to Number Groups Here we assign each number group to number range.
9

20. Maintain Number Ranges In this IMG activity, you maintain the number ranges that the system is to use to number the remittance challans. Define a number range for each number group that you have defined in the previous activity. 21. Maintain Number Groups and SAPScript Forms In this activity, we specify which SAP script forms we want to use to print the WHT Certificates. These forms are used when 1. Print WHT certificates for vendors. 2. Print WHT certificates for customers. 22. Assign Number Ranges to Number Groups In this IMG activity, you assign a number range to each number group that you have defined in the previous activity. 23. Maintain Number Ranges In this IMG activity, you maintain the number ranges that you defined in the previous activity. 24. Maintain Company code Settings (for Excise Registration) In this IMG activity, we maintain the data relating to your company codes. 25. Assign Withholding Tax to Vendor Master Data Here we assign Withholding Tax to the Vendor Master, open Change Vendor screen and flag the check box of Withholding Tax.

10