How Taxes Are Calculated (Inclusive / Exclusive / Two Taxes on the Same Item)

The system calculates taxes at the level of each line in the invoice, and lets you apply two taxes to a single line. Each tax is either exclusive, so it is added on top of the price, or inclusive, so it is part of the written price. This guide explains how to add taxes, the formula for each type, how the two taxes are calculated together, and the order of discount and tax, with numerical examples.

Before You Start

• You need the permission to manage taxes from Manage Employee Roles.
• Add taxes from the Tax Settings screen before using them in products or invoices.

Steps to Add a Tax

1. Open the Taxes screen.
2. Click Add to add a new row.
3. Enter the tax name, and the tax value as a percentage.
4. In Inclusive, choose Exclusive or Inclusive.
5. Click Save.

To apply a tax automatically to new products, set Default Tax 1 and Default Tax 2 in the System Defaults in the sales settings. You can also specify Tax 1 and Tax 2 for each product, and the purchase tax, from the product settings.

Tax Calculation Formulas

Type	Formula	Example (15% rate)
Exclusive	Tax = net × rate ÷ 100, and it is added on top of the price.	Price 100 → tax 15 → total 115
Inclusive	Tax = price × rate ÷ (100 + rate), and it is part of the price.	Price 100 → tax 13.04 → net 86.96 → total 100

Calculating Two Taxes on the Same Line

• The two taxes are calculated on the same net: the second tax isn’t calculated on the price after the first tax, meaning there is no tax on tax.
• If both taxes are inclusive, their rates are added together to extract the net from the price.
• The same tax cannot be chosen in both Tax 1 and Tax 2.
• The second tax column appears in the invoice when you have two or more taxes.

Case	Price	Net	Tax 1	Tax 2	Total
Two exclusive taxes (10% and 5%)	100	100	10	5	115
Two inclusive taxes (10% and 5%)	100	86.96	8.70	4.35	100
The first inclusive 10% and the second exclusive 5%	100	90.91	9.09	4.55	104.55

An inclusive tax is part of the price, so it doesn’t change the total; an exclusive tax is added on top of it. The numbers are rounded to the nearest two decimal places.

The Order of Discount and Tax

1. The line total is calculated: unit price × quantity.
2. The line discount is subtracted (a percentage or an amount).
3. The line’s share of the invoice’s total discount is subtracted. If the discount is a fixed amount, it is distributed across the lines in proportion to each line’s value.
4. The inclusive tax is extracted from the result, if any.
5. Taxes are calculated on the net after the discount.

Example: a 10% discount and a 15% exclusive tax

Price 100 → after the discount 90 → tax 90 × 15% = 13.5 → total 103.5.

Example: a 10% invoice discount and a 15% inclusive tax

Price 100 → after the discount 90 → inclusive tax 90 × 15 ÷ 115 = 11.74 → net 78.26 → total 90.

Shipping Tax

• You can choose a tax for shipping expenses from the shipping details in the invoice. It is applied only if there is a shipping amount.
• Exclusive: added on top of the shipping amount. Inclusive: extracted from the shipping amount.
• The invoice discount isn’t applied to shipping.

Example: shipping of 20 with a 15% exclusive tax → 23 is added to the total. Shipping of 100 with a 15% inclusive tax → 100 is added to the total, and the shipping shows as 86.96 with its tax 13.04.

How the System Works

• The tax rate and type are saved with each invoice at the time it is created; changing the tax rate later doesn’t change previous invoices. When you open an old invoice after the rate has changed, the system alerts you to the change.
• Each tax has an account in the chart of accounts that is created automatically under Current Liabilities. Sales tax is recorded as a credit in its account, and the tax on purchases and expenses in a separate account.
• Tax doesn’t enter the product’s cost (the average cost).
• Taxes are tracked from the Tax Report and the Tax Return in the Accounting Reports, choosing between invoices that are Issued (Due), Fully Paid, or Partially Paid.

Validation Rules

• The tax name and its value are mandatory, and the value is a number.
• An inclusive tax with a negative value cannot be saved. An exclusive tax can be negative (such as withholding tax).
• A tax that is used in products, invoices, entries, or settings cannot be deleted; you can deactivate the tax instead of deleting it, so it doesn’t appear in new documents.

Frequently Asked Questions

• Which should I choose, inclusive or exclusive? If your advertised prices include the tax, choose inclusive. If the tax is added on top of the price, choose exclusive.
• Is the second tax calculated on the first? No, both taxes are calculated on the same net.
• Is the discount applied before or after the tax? Before; the tax is calculated on the amount after the discount.
• How do I record withholding tax? Add an exclusive tax with a negative rate, then link it to the appropriate tax type in the e-invoicing settings if you use it.
• I changed the tax rate. Why didn’t the old invoices change? Because each invoice keeps the rate it was created with.
• Why can’t I delete a tax? Because it is in use; deactivate it instead.