Determination of tax code in Purchase Order creation

Sunday, May 07, 2023 11:43 AM

Taxation is a critical aspect of any business operation, and it plays a significant role in the procurement process of materials and services in SAP MM (Materials
Management) module. To accurately calculate and apply taxes in the procurement process, SAP MM utilizes tax conditions and tax codes that define the behavior of
taxes in various scenarios. In this article, we will discuss the how the tax rate was populated during the creation of Purchase Order.

1. Example of real life Implementation: GST

GST (Goods and Service Tax) is an indirect tax that was used in some countries and also Malaysia. Each country has it different ways implementing the GST in their
taxation system For example, some countries like India used the intrastate, interstate and import GST system, for Malaysia it is divided into standard rated GST (6%),
Zero- Rated GST (0%) and Exempted Rated GST while for Singapore ,supplies for GST purposes can be broadly classified into two categories; that is taxable supply
(standard-rated supply (8%) and zero-rated supply (0%) and non- taxable supply (exempt supply and out-of-scope supply)

Tax Malaysia (Ended in 2018) India Singapore

Categories
Standard 6% 5% to 28% (varies by goods and services) 7%
Rate
Zero- Exports, certain basic food items, certain Exports, certain basic food items, certain services Exports, international services, investment
Rated medicines precious metals
Reduced None Some goods and services, such as renewable energy Some goods and services, such as healthcare
Rate and education
Exempt Basic food items, healthcare, education, Education, healthcare, and a few other items Financial services, residential properties, and
and more more
Intrastate Single GST zone, applies to all goods and CGST and SGST levied by central and state governments GST applies to all goods and services within
services regardless of location within respectively, with the same GST rate applying to both Singapore, regardless of location within the
Malaysia components of the transaction country
Interstate Single GST zone, applies to all goods and IGST levied by central government, equivalent to the sum of GST and customs duty apply to all imported
services regardless of location within CGST and SGST, applies to all inter-state transactions goods and services
Malaysia
Import GST and customs duty apply to all GST and customs duty apply to all imported goods and services GST and customs duty apply to all imported
imported goods and services goods and services

2. How the tax code automatically determined in PO creation?

 Condition Technique

Tax condition/ Condition type

 Definition - Tax condition represents certain conditions that need to be satisfied for the tax amount to be calculated in a certain way
 Usage - Tax condition is used to determine the tax amount that needs to be paid by a taxpayer based on certain conditions, such as tax exemptions or deductions.
 Customization - Tax condition can be customized to meet the specific tax requirements of a business.

The tax code chosen in a purchase order (PO) is determined by the condition type entered in the PO. The condition type specifies the tax code used for the calculation
of taxes on the purchase order. The tax code is linked to the condition type in the pricing procedure, which is a set of rules used to calculate the price of goods or
services. The pricing procedure determines which condition types are used to calculate taxes and which tax codes are assigned to those condition types.
When the user enters a condition type in the PO, the system searches for the tax code associated with that condition type in the pricing procedure and automatically
assigns it to the PO. This automated process ensures that the correct tax code is applied to the PO and eliminates the need for manual intervention. It also helps to
ensure compliance with tax regulations and reduces the risk of errors in tax calculations.

Flowchart

Identify the need to default tax codes in a PO

Determine the relevant condition tables for tax codes

Set tax indicator in Material/ Plant/ Account Assignment

Create an access sequence to search for condition records

 Create an access sequence to search for condition records

Define a new condition type for defaulting the tax code in POs

Assign the access sequence and relevant condition tables to the new condition type

Set up the new condition type in the pricing procedure for POs

Define the default tax code value for the new condition type

 Purchase Info Record

There is a difference between maintaining tax code at the vendor level or material level in the Purchase Info Record (PIR) in SAP. Regarding the organizational level for
tax code determination, there is a difference between maintaining tax code at the Plant, Company Code, or Purchasing Organization level. The choice of the level of tax
code determination depends on the specific business requirements and the tax regulations applicable to the transactions.

Level of Tax Code Description Applicability

Determination
Vendor Level Tax code is applicable to all materials procured Useful when the vendor has a standard tax code applicable to all its products or services
from the vendor
Material Level Tax code is specific to the material being Useful when different materials from the same vendor are subject to different tax codes
procured
Plant Level Tax code is applicable to all materials procured Useful when the same material is procured for multiple company codes within the same
for a particular plant plant, and the tax code is the same for all company codes
Company Code Level Tax code is applicable to all plants and purchasing Useful when the same material is procured for multiple plants or purchasing organizations
organizations within a company code within the same company code, and the tax code is the same for all of them
Purchasing Tax code is applicable to all company codes and Useful when the same material is procured for multiple company codes and plants within
Organization Level plants within a purchasing organization the same purchasing organization, and the tax code is the same for all of them

Flowchart
Maintain Purchase Info Record transaction (ME11

Enter the vendor and material information for which you

want to maintain the PIR.

Select the Organizational level for which you want to maintain the tax code. This could be Plant,
Company Code, or Purchasing Organization.

Click on the Taxes tab to maintain the tax code and tax rate information.

In the Tax Data section, enter the appropriate tax code for the tax jurisdiction applicable to the vendor
and material combination.

If there are any tax exemptions or special tax rates applicable, enter those in the
respective fields.

Tax code available for PO creation

 Tax code available for PO creation

3. Which one is prioritized first during automatic tax determination during PO creation?
The tax code from the condition technique has higher priority than the tax code from the info record. During automatic tax determination in SAP, both conditions and
PIR are used to determine the appropriate tax code for the PO. However, the system gives priority to the tax conditions over the PIR. This means that if there is a tax
condition defined at the PO item level, the system will use that tax condition to determine the tax code for the PO item, even if there is a tax code maintained in the
PIR for the same vendor and material combination. On the other hand, if there is no tax condition defined at the PO item level, the system will use the tax code
maintained in the PIR for the vendor and material combination to determine the tax code for the PO item. In summary, tax conditions take priority over PIR during
automatic tax determination in SAP, but if there is no tax condition available, the system will fall back to the tax code maintained in the PIR.

4. Conclusion
Taxation is a complex and critical aspect of the procurement process, and SAP MM provides robust functionality to accurately calculate and apply taxes using tax
conditions and tax codes. Proper configuration of tax conditions and tax codes in SAP MM is crucial to ensure accurate tax calculation and compliance with tax
regulations. By understanding the behavior of tax conditions and tax codes in SAP MM, businesses can streamline their procurement process and ensure compliance
with tax laws, ultimately contributing to their financial accuracy and operational efficiency.