Lesson 2 of 7 · 3 min

Sales tax and VAT on an invoice

Each line carries its own tax rate, worked out to the paisa, and prices can include the tax or have it added.

Item Price Rate Tax on one
Cooking Oil 5L tin Rs 2,700.00 18% Rs 486.00
Black Tea 900g Rs 1,750.00 18% Rs 315.00
Basmati Rice 25kg Rs 8,800.00 Exempt —
Chakki Atta 20kg Rs 2,950.00 Exempt —
Each line has a tax rate, from its item. Noor Traders charges sales tax at 18% on oil, sugar and tea, while rice and atta are exempt. Change a line's rate when one sale is different. The rates Ledger starts you with are a starting point: check yours with your accountant. In Accounts → Tax rates, add a New tax rate; a rate's percentage never changes once it's made, so to change one, archive it and add the new rate.
Tax invoiceNT-0043
Unpaid
FROM
Noor Traders
NTN 7654321-0 · STRN 32-77-8761-234-55
BILLED TO
City Cash & Carry
Date 15 Oct 2026Due 14 Nov 2026
DESCRIPTION
QTY
PRICE
TAX
AMOUNT
Cooking Oil 5L tin20Rs 2,700.0018%Rs 54,000.00
Cooking Oil 5L tin20 × Rs 2,700.00 · 18%Rs 54,000.00
Black Tea 900g12Rs 1,750.0018%Rs 21,000.00
Black Tea 900g12 × Rs 1,750.00 · 18%Rs 21,000.00
Chakki Atta 20kg30Rs 2,950.00—Rs 88,500.00
Chakki Atta 20kg30 × Rs 2,950.00 · —Rs 88,500.00
Subtotal
Rs 163,500.00
Sales tax 18%
Rs 13,500.00
Total
Rs 177,000.00
The tax is worked out line by line, rounded to the paisa, and the totals show it by rate. Twenty tins of oil carry Rs 9,720 of tax, twelve packs of tea Rs 3,780, and thirty bags of atta none, so its tax column says —.
Before
Tax added on
A tin at Rs 2,700.00
Plus 18%: the customer pays Rs 3,186.00
Prices include tax
After
Tax taken out
A tin at Rs 2,700.00, all in
Of which tax: Rs 411.86
Do your prices already have the tax in them? Switch on Prices include tax in Settings → Books for every new invoice, or with the switch above one invoice's lines. Then Ledger takes the tax out of the price instead of adding it on. The Clay Room, in the UK, prices that way: its Speckled Stoneware Mug at £24.00 is £20.00 plus £4.00 VAT at 20%.
Posted as
Journal entry
NT-0043 · City Cash & Carry
Account
Debit
Credit
Accounts receivableCity Cash & CarryRs 177,000.00
Cost of goods soldRs 135,340.00
SalesRs 163,500.00
Sales tax payable (output tax)Rs 13,500.00
StockAt average costRs 135,340.00
TotalRs 312,340.00Rs 312,340.00
Debits equal credits
The tax you charge isn't your income: it's FBR's money you're holding (HMRC's, in the UK). It goes to Sales tax payable, which the tax summary counts up for your return.

Item	Price	Rate	Tax on one
Cooking Oil 5L tin	Rs 2,700.00	18%	Rs 486.00
Black Tea 900g	Rs 1,750.00	18%	Rs 315.00
Basmati Rice 25kg	Rs 8,800.00	Exempt	—
Chakki Atta 20kg	Rs 2,950.00	Exempt	—

Try it

Opens Ledger. You'll be asked to sign in first; new businesses get a free week, no card needed.

Open your tax rates

Quick check

2 quick questions. Pick an answer and Leo will tell you how you did.

1. A tin of oil is Rs 2,700 and your prices don't include tax. What does the customer pay for one, at 18%?

Rs 2,700.00Rs 3,186.00Rs 2,288.14

2. Where does the sales tax on an invoice go in your books?

Into your sales, as incomeInto Sales tax payable: it's owed to the tax office

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