What are taxes & Why do we need taxes?
It is a financial charge that is imposed upon an individual or a company(legal entity) by state or central government to fund public expenses.
In case you fail to pay any tax you would be punishable by Law.
You could be somebody who has taken the decision to sell online or you may have an offline business and now plan to expand online. Since you are entering into a new field you should be fully aware about all the kinds of taxes that you may need to pay. Failing to do so may land you in big trouble. Hence, having the knowledge of the taxes is very crucial.
When you start a new business the best way to be sure on taxes part would be, the guidance from an expert from the field. Taxes may vary on the type of business that you are starting.
There are different types of taxes that you may need to pay Direct Tax, Indirect Tax or Sales Tax.
Direct Tax is the tax that one needs to pay as the citizen of India under the Income tax act ,1961. This comes out to be 30% of the profit from the business. Businesses with only online presence may have to pay 25% of the profit.
Indirect Tax is the tax that you pay if you provide any service such as deliver charges. When you run an online store in India you end up charging 15% tax (14 percent service charge, 0.5 percent Education Cess and 0.5 percent Krishi Kalyan Cess) as Service tax.
Lets us see one more example to make this clear, if suppose you sell on any market place like Amazon, Flipkart etc and use there pickup & delivery service, then you will have to pay the service tax to these market places.
Sales tax is the tax that you may have to pay. When the delivery is in the same state as yours you will have to pay VAT & pay CST when the delivery is outside your state of business.
Now we know what are all the types of taxes that we need to keep track of while selling online. The exact tax value that applies to your business should be consulted & verified from a specialist.
How to configure taxes on your store?
Though, the standard tax slabs are already defined in the system which you can use on your products but in case you want to create a new tax slab then follow the below steps. To create a new tax slab, first you will create a new tax rate and then create a tax class for the same.
- Click on Settings>Localization.
2. Click on Tax Rate.
3. To create a new Tax Rate, Click on Add button.
4. Enter the below details for the tax rate.
- Tax Name- Define the name of the tax rate.
- Tax Rate- Define the value of the tax rate.
- Type- Select the tax rate type.
- Customer Group- Select customer groups to which this tax rate will be applicable.
- Geo Zone- Select the Geo Zone in which the tax rate will be applied.
5. Click on Save button.
Now you will create the tax class, which is mapped to the product
- Click on Settings>Localization.
2. Click on the Tax Class icon.
3. Click on Add button to create new tax class.
4. Enter the Tax class title and Description.
5. Click on Add icon.
6. Select the Tax rate for this class. Please refer the tax rate section above for reference.
7. Select the based on address to apply this rule.
As octroi is charged on the shipping, so we have selected the based on address as shipping address.
8. Define the sort order in the priority column for the rate.
9. To apply more rates, click on add icon again and follow the same process.
10. Click on Save button to create the class.
**Now, Go to manage/add product and select the tax class that you want to be applied on the product.
VAT/CST(Tax class) differs for different categories. You have the option to select the relevant tax class for each product individually. You can do this in bulk import while adding the products on your store as well.