How sap helps in tax accounting?

In order to understand how sap helps in tax accounting, we need to understand what is tax accounting and what
are the challenges faced by tax department in a company.

What is tax accounting?

Whenever company does a business transaction, corresponding tax amounts has to be paid to the concerned tax
authority.
The tax rate (tax percentage) is decided by the tax authority. Tax authority decides how many different taxes
are applicable on a business transaction and corresponding tax percentages.
Tax authority in each country has a unique set of taxes (list of different taxes) which may be applicable to
business transactions.
Company is liable to pay taxes either monthly/ quarterly/ annually and file tax returns with the tax concerned
tax authority. For tax payment and filing of tax return, company has to prepare various reports which have
details of transaction and corresponding tax amounts. For company to be able to prepare tax reports, whenever
business transaction happens along with transaction details corresponding tax amount also needs to be
recorded.
Hence tax accounting refers to recording of taxes along with business transaction details for the purpose of tax
payment and tax return filing.
Example:
Consider a company selling a product to customer.
Product price: 100 Tax rate: 12%

Company will record below accounting entry in its account books

DR. Customer 112
CR. Sales 100
CR. Tax 12

Challenges faced by tax department in a company

Incorrect reporting of tax by company may invite legal action by tax authority. Company cant afford to make
mistakes in tax reporting and tax filing.
Everyday company does a large number of transactions, tax department employees of the company become
overloaded with the task of calculating and recording tax. Moreover, when it comes to tax filing, tax
department of the company has to prepare various reports by putting together all the tax relevant information.
Preparing tax files manually is very time consuming and prone to mistakes.
Recording and tracking tax information manually is error prone.
Preparing tax files manually becomes time consuming.
Companies need to be more efficient and effective in tax handing. Companies need to prepare tax files
(reports) quickly as well as error free.

How sap enables books keeping of tax?

Sap enables automatic calculation and recording of tax information. Whenever a transaction happens, along
with transaction details tax information is also recorded automatically.
Since tax is calculated and recorded automatically hence chances of recording wrong tax amount is less (less
manual intervention ensures less chances of error).
Since all transaction and respective tax amount is recorded in database, hence tax files (reports) can be
generated as and when needed without time delay.
Hence sap enables better tax reporting and faster generation of tax reports.

Sap handles below types of taxes:

Tax on sales and purchases

When company does a purchase from vendor, tax is applied and charged by the vendor. This tax is known
as input tax.

CR Vendor 112
DR Purchase account 100
DR Input tax account 12

Whenever company does a sale to customer, tax on sales is applied and charged to customer. This tax is known
as output tax.

DR Customer 165
CR Sales account 150
CR Output tax account 15

Company is liable to pay tax amount 15 to tax authority but since company already paid 12 as input tax. Hence
net tax amount yet to be paid is 3 (15-12).
Net tax payable = Output tax collected Input tax already paid

Note: Tax authority can set a portion of input tax as non-deductible portion which cannot be claimed (cannot
be offset against output tax) from tax authority.

Sales tax & use tax

Sales tax & use tax are used in USA.
Sales tax is applied when goods are procured for the purpose of consumption from supplier within the state.
When goods are procured from outside state, then use tax is applied.
Offsetting output tax with input tax is not applicable in case of sales tax & use tax.

Withholding tax
In certain countries, tax authority mandates that a portion of vendor invoice is withheld and paid directly to tax
authority.
Example:
Company needs to pay 112 (inclusive of tax amount 12) to vendor and vendor needs to pay tax amount 12 to
tax authority.

CR Vendor 112
DR Purchase account 100
DR Input tax account 12

Instead of vendor paying 12 to tax authority, company will withheld tax amount of 5 and pay directly to tax
authority. Vendor will pay tax amount 7 to tax authority.
Company will record below accounting entry in its account books.

CR Vendor 107
DR Purchase account 100
DR Input tax account 12
CR Withholding tax account 5

Tax authority uses the concept of withholding tax so as to restrict tax evasion and get access to tax amount
quicker.
Sap enables automatic calculation and recording of tax information along with transaction details and hence
enables company to handle tax accounting efficiently and effectively.