Indirect tax software is software that works out, files and reports the sales tax, VAT and GST that a company owes in every state and country where it sells. An indirect tax is a tax that the seller collects from the buyer on each sale and then pays to the government. GST in India, VAT in Europe and sales tax in the United States are all indirect taxes.
For a company that sells only in India, the main indirect tax is GST. GST rates are the same across the country, and the filings go to one GST portal. A few goods, such as petrol, diesel and liquor, are taxed outside GST. A company that sells into many countries faces many systems at once. Each country has its own tax, its own rates, its own invoice rules and its own filing calendar.
The United States is the hardest case, and most of the companies in this category build first for American sellers. The country has no national sales tax. Instead, each state sets its own sales tax, and many cities and counties add their own on top. So the same product can be taxed at different rates in two towns a few kilometres apart. Some products, such as clothing, are taxed in some states and not in others. A seller from outside a state must collect that state's tax once its sales into the state cross a threshold. In many states, the threshold is $100,000 of sales a year. This rule is called economic nexus.
Take, for example, a company in Jaipur that sells handmade rugs to American households through its own website. When a customer in Seattle orders a $600 rug, the e-commerce platform sends the address and the product to the tax software before the payment page appears. The software finds the combined state and city rate, about 10.5 per cent there, and adds about $63 of sales tax to the bill. It records the tax as owed to Washington state. At the end of each filing period, it prepares the return for every state where the company must collect tax, and files it. It also tracks the company's sales in every other state, and warns when sales in a new state come close to the threshold.
The same software does this job in other markets. It prepares VAT returns in Europe and files GST in India. In many countries, it also reports each invoice to the tax office as it is issued, which is called e-invoicing. Customs duty on goods shipped across borders is a separate tax, handled by customs clearance software.
The software takes its sales data from the ERP and the e-commerce platform. It sends the tax owed to financial close software, so that it is recorded in the books. Some providers also sell the filing work as a service: their own staff prepare and file the returns for the seller.