How the "Sales Tax on Sales Tax" tax calculation option works for Sri-Lanka Entity.

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Posted on by Nikhil More

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Hi Community,
I am trying to use the "Sales Tax on Sales Tax" option on Sales Tax Codes for Tax Calculation.

For our Srilankan Entity, We have 18% as VAT on Gross Amount + 1.25% as SSCL on Existing 18% VAT.

To Achieve this, I was trying to use this functionality, but unable to achieve so.

Could someone help me to understand this

Following is the Scenario for better understanding -

BASIC	10000
SSCL% on Basic	1.25
SCCL Amt	125
Ass Value (SCCL amt + Basic)	10125
VAT 18% (18% on Ass Value)	1822.5
Total Inv Amount (Sum of Ass Value and 18%)	11947.5

(Without using this option - and mapping separate codes to the groups this is achievable - but in Sales Tax form- Its show two separat calculations: Scre

enshot 2)

Screenshot1

Screenshot2

Thank you in Advance.

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Dynamics 365 Finance

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Saif Ali Sabri 2,603 Moderator on at

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Your scenario for the Sri Lanka entity is a classic case of compound tax calculation, where one tax (SSCL) forms part of the base for another tax (VAT). Let’s break down how the “Sales tax on sales tax” option works in Dynamics 365 Finance and Operations and how to configure it correctly for your case.
🧾 Concept Overview
The Sales tax on sales tax parameter allows one tax code’s calculated amount to become part of the taxable base for another tax code. In your case:

SSCL 1.25% applies on the basic amount (10,000).

VAT 18% applies on the basic + SSCL amount (10,125).

So VAT must be calculated on top of SSCL, not independently.
⚙️ Configuration Steps
To achieve this in D365FO:

Create SSCL Tax Code (1.25%)

Origin: Percentage of gross amount

Calculation method: Whole amount

Leave “Sales tax on sales tax” blank (since this is the first-level tax).

Create VAT Tax Code (18%)

Origin: Percentage of gross amount

Calculation method: Whole amount

In the field “Sales tax on sales tax”, select SSCL1.25%. → This tells the system to include SSCL’s calculated amount in the VAT base.

Assign both codes to the same Sales tax group and Item sales tax group**.

Test the calculation on a transaction:

Basic: 10,000

SSCL (1.25%): 125

VAT (18% on 10,125): 1,822.50

Total tax: 1,947.50 ✅

🧩 Common Pitfalls

If “Sales tax on sales tax” is left blank, both taxes calculate independently (as shown in your second screenshot).

Ensure both tax codes belong to the same tax group; otherwise, the dependency won’t trigger.

The Marginal base should be set to Invoice total incl. other sales taxes for the VAT code.

✅ Verification
After setup, check under Tax > Inquiries and reports > Sales tax transactions — you should see SSCL calculated first, then VAT on the combined base.
Would you like me to outline how to configure this same logic using Electronic Reporting (ER) for compliance reporting in Sri Lanka? It can help automate your VAT + SSCL summary and drill-down reports.

Regards from Pakistan

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