How tax is calculated (GST, VAT and US sales tax)
Where tax comes from on a document, how it is worked out for India, Denmark and the US, and where it is recorded.
Legasum uses one tax engine for every country. Your company's Country (set in the company settings) decides which tax scheme and which tax categories are on offer. This article explains what happens to a line's tax from entry to the books.
Where a line's tax category comes from
| Document | How the tax category is chosen |
|---|---|
| Quotation, sales order, invoice | The Tax column on each line. It says From item for a catalogue item, or No tax for a custom line until you pick a category. |
| Purchase order, bill | The item's tax category only. Custom lines carry no tax. |
| POS, recurring invoices and bills | The item's tax category. |
| Expenses and other income | None. No tax is added. |
An item's own category is set in the item form; see Add a product or service. A category chosen on a line must belong to your company's tax scheme, otherwise you see "Please select a valid tax category."
The calculation
For each line:
- Line amount = Qty x Unit Price, less the Disc %.
- Each tax component of the scheme that applies is that amount times its rate, rounded to two decimals.
- The line total is the amount plus tax.
Tax is added on top of the unit price. The item form's Price includes tax option is stored but is not used when documents are calculated.
A category can be marked Exempt, Zero-rated or Reverse charge. Exempt and zero-rated lines get no tax. On a reverse-charge line the supplier charges 0%; on a bill Legasum books a matching self-assessment only if a non-zero rate has been set for that category.
The form shows the result live: Subtotal (before tax), Tax and Total. The tax is calculated again when you post, from each line's saved category, and the posted amounts are the ones that count.
India - GST
The categories are 0% slab, 5% slab, 12% slab, 18% slab, 28% slab, Exempt, Zero-rated (exports / SEZ) and Reverse Charge (RCM).
- For a sale within the same state, CGST and SGST each take half of the slab rate. For a sale to another state, IGST takes the whole rate.
- Your state comes from your company's GSTIN. Add it under Business Registrations in the company settings.
- The customer's state comes from the GSTIN on their Tax Registrations tab, or failing that from the state typed in their billing address. If neither is known, Legasum assumes the same state as yours, so CGST and SGST are used.
- For a customer outside India, no domestic split is forced; choose Zero-rated for exports.
Denmark - VAT
There is one component, VAT. The categories are Standard-rated (25%), Zero-rated (e.g. exports), Exempt and Reverse charge (EU B2B) (0% on the document).
USA - sales tax
US tax depends on where the customer is, and Legasum comes with no rates pre-loaded. The company owner enters them in Tax Jurisdictions. The categories are Taxable and Tax-exempt.
- The components are State, County and City / local tax.
- Tax is based on the customer's billing address: the state (as a two-letter code) and, if a city jurisdiction with the same name is set up, the city.
- If the customer's state has no jurisdiction set up, or the customer is outside the US, no tax is added. Legasum never guesses a rate.
- A draft US invoice shows no tax. The real tax is worked out when you post the invoice, so the total can change at that moment.
Where tax is recorded
- Tax charged on sales is credited to a payable account for each component, such as "VAT Payable" or "CGST Payable".
- Tax paid on purchases is debited to a receivable account for each component, such as "VAT Receivable", so you can offset it.
- The Tax Summary report nets the two. India and the US also have GST HSN/SAC and US Sales Tax reports.
Good to know
- Tax categories and rates are not editable in the app, apart from US jurisdictions and rates.
- If the tax category list is empty, the company has no country set. Choose one in the company settings.
- A customer's or supplier's address and tax numbers can change what a later report shows for an old invoice, because place of supply is worked out again at report time.