Deductible Tax – A Tax already paid to a Vendor that can be balanced against Output Tax.
While Purchase of materials, the Tax paid on the Purchase of items can be availed back from the government, this is called a Deductible Tax. Here, the Tax is not loaded to Material Inventory, It is posted to a separate G/L account as per the configuration and later stage it will be cleared-off by Financials.
Non-Deductible Tax – A Tax already paid to a Vendor that cannot be balanced against Output Tax.
In case of a Non-Deductible tax, the Tax amount will be loaded to Material Inventory. Here, the Company can not claim this Tax amount back from the government.
Taxable persons pay Input Tax to Vendors and Output Tax to the Tax Authority.
One part of the Input Tax, the Deductible Input Tax, can be balanced against the Output Tax, that is, a business pays tax on Sales and Purchases only on its own added value.
The other part, the Non-Deductible Input Tax, is excluded from this arrangement and depends on the applicable tax law of the appropriate country.