# Tax Category

If you want to apply different kinds of taxes based on Tax Categories, create Tax Categories from:

Home > Accounting > Taxes > Tax Category

### 1. Prerequisites[ ](https://docs.erpnext.com/docs/v13/user/manual/en/accounts/tax-category#1-prerequisites) <a href="#id-1-prerequisites" id="id-1-prerequisites"></a>

Before creating and using a Tax Category, it is advised to create the following first:

1. Tax Rule

### 2. How does a Tax Category work[ ](https://docs.erpnext.com/docs/v13/user/manual/en/accounts/tax-category#2-how-does-a-tax-category-work) <a href="#id-2-how-does-a-tax-category-work" id="id-2-how-does-a-tax-category-work"></a>

Creating a Tax Category is simple, go to the Tax Category list, click on New and enter a name.

* A Tax category can be linked to one or more Tax Rules.
* This Tax Category can be assigned to a Customer, so when that Customer is selected, the Tax Category will be fetched.&#x20;
* This also applies in case of a Supplier.
* This will fetch the Sales Tax Template linked to the Tax Rule.&#x20;
* Hence, the rows in the Tax table will be automatically filled.
* Tax Category can be used to group Customers to whom same tax will be applied.&#x20;
* For example, Government, NGO, commercial, etc.

  ![Tax Category in Sales Invoice](https://docs.erpnext.com/files/tax-category-in-invoice.gif)

**Tip:** One Tax Category can be assigned to multiple Tax Rules. So you can create different combinations to apply taxes automatically to transactions.

### 3. Assigning Tax Category[ ](https://docs.erpnext.com/docs/v13/user/manual/en/accounts/tax-category#3-assigning-tax-category) <a href="#id-3-assigning-tax-category" id="id-3-assigning-tax-category"></a>

Tax Category is automatically determined in a transaction by either the Party Address or Party Master (Customer/Supplier).

&#x20;You can assign Tax Category based on:

1. Customer
2. Supplier
3. Address Billing or Shipping.&#x20;

You can select whether Billing Address or Shipping Address gets preference by changing the 'Determine Address Tax Category From' option in Accounts Settings.&#x20;

Tax Category is determined from Party Address first.&#x20;

If the Address is not assigned any Tax Category, then the Party's Tax Category is used. ![Tax Cat Address](https://docs.erpnext.com/files/tax-category-in-address.png)

1. Item
2. You can also manually select the Tax Category in a transaction.

### 4. What effect does the Tax Category have in a transaction?[ ](https://docs.erpnext.com/docs/v13/user/manual/en/accounts/tax-category#4-what-effect-does-the-tax-category-have-in-a-transaction) <a href="#id-4-what-effect-does-the-tax-category-have-in-a-transaction" id="id-4-what-effect-does-the-tax-category-have-in-a-transaction"></a>

* Specific Item Tax Templates for that Tax Category are automatically set for items.
* You can create Tax Rules to automatically set a specific Sales / Purchase Taxes and Charges Template based on different Tax Categories in transactions.


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