Tax Types in the System: Exempt, Zero-Rated, and Others — Setup, Calculation, Entries, and Reports
First: The Meaning of the “Exempt” Tax in the System
In some accounts, a tax named Exempt appears in the taxes list, and next to it may appear the VAT and Zero-Rated taxes. These taxes are not special types in the system, but are default taxes that the system adds automatically when the account is created according to the chosen country.
The exempt tax is considered a tax with a rate of zero percent, used to show that the product or service is exempt from tax, without producing any tax amount on the invoice. Its behavior in the system is determined by only two things: the tax value, and whether it is inclusive or exclusive in the price.
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Note: The system doesn’t distinguish between the “exempt” tax and the “zero-rated” tax in terms of calculation or entries, since both have a rate of zero. The difference between them is limited to the e-invoice, where the classification (exempt, subject to the zero rate, or outside the scope of tax) is determined through the tax linking settings with the tax authority, as explained later in this guide.
Second: Tax Setup
Taxes are managed from the Tax Settings page, and this requires having the permission to manage taxes. Each tax consists of the following fields:
| Field | Description |
|---|---|
| Tax | The tax name as it appears in invoices and reports. |
| Tax Value | The percentage. A negative value may be entered for exclusive taxes only (such as withholding tax). |
| Inclusive | Inclusive: the entered price includes the tax. Exclusive: the tax is added to the price. |
To add a new tax, click Add, then enter the data, then click Save, and the message Tax settings updated appears.
Default Taxes
- The first and second taxes that are added automatically to new products can be specified from the Default Product Taxes page.
- And in the product page, a purchase tax different from the sales tax can be specified through Advanced, with the ability to choose Same as Sales Tax 1 or No Tax.
- And a tax can be linked to a shipping option from the shipping options settings.
Third: Tax Types and How They Are Calculated
1. Exclusive Tax
The tax is calculated on the price and added to it.
Example
The item price is 100, and the tax is 15% exclusive: tax = 15, and the total = 115.
2. Inclusive Tax
The entered price is treated as including the tax, and the system extracts the tax value from it without changing the total.
Example
The item price is 100 including 15% tax: tax = 13.04, net = 86.96, and the total = 100.
3. Zero-Rated Tax and Exempt Tax
A tax with a rate of zero, which appears on the invoice without adding any amount, and no line is created for it in the accounting entry.
Example
The item price is 100 with an exempt tax: tax = 0, and the total = 100. And the amount 100 appears in the tax reports within this tax’s sales.
4. Negative Tax (Withholding Tax)
An exclusive tax with a negative value, deducted from the invoice total, and used in Egypt for deduction and addition. A negative tax isn’t allowed to be inclusive, otherwise the message You cannot save the tax named #### with a negative amount and the inclusive type appears.
Example
The item price is 1,000 with 14% VAT and a withholding tax of −1%: total = 1,000 + 140 − 10 = 1,130.
5. Two Taxes on One Line
The system lets you choose two taxes for each line. Each of them is calculated independently on the line’s net after the discount, and the second tax isn’t calculated on the amount of the first tax.
Example
The line’s net is 100, the first tax is 14%, and the second tax is 5%: the first tax = 14, the second = 5, and the total = 119.
Discount and Tax
The line discount is applied first, then the invoice discount, then the tax is calculated on the amount after the discount.
Fourth: The Effect of Taxes on Accounting Entries
For each tax, the system creates a main account under current liabilities named [Tax Name] Payable, from which two accounts branch out that are created on first use:
| Account | Use |
|---|---|
| [Tax Name] Collected | Sales tax (credit) |
| [Tax Name] Paid | Purchase tax (debit) |
For example, the “VAT” tax is recorded in the accounts VAT Collected and VAT Paid under the main account VAT Payable.
A Sales Invoice Entry (15% Exclusive Tax)
| Account | Debit | Credit |
|---|---|---|
| The client | 115 | — |
| Sales | — | 100 |
| VAT Collected | — | 15 |
A Sales Invoice Entry (15% Inclusive Tax, Price 100)
| Account | Debit | Credit |
|---|---|---|
| The client | 100 | — |
| Sales | — | 86.96 |
| VAT Collected | — | 13.04 |
A Sales Invoice Entry (Exempt or Zero-Rated Tax)
| Account | Debit | Credit |
|---|---|---|
| The client | 100 | — |
| Sales | — | 100 |
No tax line appears in this entry, because its value is zero.
A Purchase Invoice Entry (15% Exclusive Tax)
| Account | Debit | Credit |
|---|---|---|
| Inventory or Purchases | 100 | — |
| VAT Paid | 15 | — |
| The supplier | — | 115 |
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Note: The same rule applies to returns, credit and debit notes, expenses, incomes, and the point of sale, with reversing the two sides in returns. And the tax return can be settled between the collected and paid accounts through the Return Settlement option in general accounting.
Fifth: The Effect of Taxes on Reports
| Report | Content |
|---|---|
| Detailed Tax Report | The tax details for each document and line, with the option Show Items Not Subject to Tax, and the ability to display on an accrual basis or on the basis of fully paid invoices. |
| Summary Tax Report | The total of each tax during the period. |
| Tax Return | A sales table including (tax name, sales, adjustment, tax due), and a purchases table including the tax paid, with a line for each tax at its rate. |
The exempt tax and the zero-rated tax appear in these reports as a separate line for each, with the value of the sales subject to them and a tax of zero. Therefore it is recommended to create an independent tax for each case (exempt, zero-rated, outside the scope) instead of leaving the items without tax, so that each category appears separately in the return.
Sixth: Tax Classification in the E-Invoice
Saudi Arabia
The classification of zero-rated taxes is specified from the Saudi E-Invoice Settings, in the Tax Settings section, where each zero-rate tax is linked to the Tax Exemption Code and the Tax Exemption Reason, within one of the following categories:
| Category | Examples of Codes |
|---|---|
| Exempt Supplies | Financial services, a life insurance contract, tax-exempt real estate supplies |
| Zero-Rated Supplies | Export of goods, export of services, international transport, medicines and medical equipment, qualifying metals, education, health, the military sector |
| Outside the Scope of Tax | The exemption reason is written manually |
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Warning: If the zero-rate tax isn’t linked to an exemption code, the system sends it to the Authority as outside the scope of tax. Therefore an “exempt” tax must be linked to a code from the exempt supplies category, and a “zero-rated” tax to a code from the zero-rated supplies category. As for taxes with a rate greater than zero, they are classified automatically as a standard tax.
Egypt
Each tax in the Egyptian E-Invoice Settings is linked to a type and a sub-type from the Tax Authority’s types. For example, VAT is linked to the type (Value Added Tax), the exempt tax is linked to the sub-type Exempt Goods or Services, exports to the sub-type Export Abroad, and withholding tax to the type Withholding Tax.
UAE
Each tax in the UAE E-Invoice Settings is linked to a tax code, and the system adds the default taxes automatically: standard-rated, reverse charge, zero-rated, exempt, supplies within the GCC countries, adjustments, and excise tax. A single code cannot be linked to more than one tax, except for the exempt code.
Jordan
A tax with a rate greater than zero is sent as a standard tax, and a tax with a zero rate is sent as outside the scope of tax.
Seventh: Editing and Deleting Taxes
- When the rate of a used tax is edited, the previous documents keep the old rate. And when an old document is opened for editing, the message The value of tax ### changed from *% to *% appears with the options Change or Ignore.
- A tax that is used in a product, an accounting entry, a shipping option, a purchase invoice, or the e-invoice linking cannot be deleted. Instead, it can be deactivated, so it doesn’t appear in new documents and stays visible in previous documents.
Frequently Asked Questions
What is the difference between the exempt tax and the zero-rated tax in the System?
There is no difference in calculation or entries, since both have a rate of zero. The difference appears in the e-invoice through the code linked to each, and in the tax reports when an independent tax is created for each.
Does the exempt tax create a line in the accounting entry?
No, because its value is zero.
Can an “exempt” tax be deleted if it isn’t needed?
Yes, if it isn’t used in any product or document; otherwise it can be deactivated.
Is the second tax calculated on the first tax?
No, each of them is calculated independently on the line’s net.