1. Create Regime to Rate Setup.

2. Enable Cross- Regime Compounding option for Tax- Regime and set the compounding Precedence. (This step is optional. Required only if compounding of taxes of any other regime depending / dependent on this regime eg., Excise Regime and VAT Regime).

3. Set the Compounding Precedence for tax1 as 1

4. Set the Compounding Precedence for tax2 as 2

5. Tax Status and Tax Rate Setup are generic. No compounding related setups required at these levels. 6. Create a Tax Determination factor Set (This factor set will be used for all tax rules)

(All the tax rules are created to be driven by Tax Classification Code. We can use various other determining factors suitable for each rule. We can as well create a factor set to determine which Tax regime should apply to a Transaction). 7. Create a Tax Condition Set using tax rate of Tax1 (This Condition set will be used for tax rules for both Tax1 and Tax2)

(All Tax rules are created to use the same condition set).

8. Define a Tax-basis formula for compounding required on Tax2. Select the taxable basis type as Line Amount as the compounding is required on Line Amount + Tax1. In Compounding details, select the Tax which should be included in the taxable base. (If Cross-Regime compounding is enabled for tax-regime, we can use compounding tax from other regime also)

9. Set Tax Rules for the Tax1. a. Tax Applicability by default is Not Applicable. It is made applicable based on the Tax rate selected in the Transaction using Tax Determination set and Tax Condition set . b. Tax Rate is also defaulted using the same logic depending on tax code is selected in transaction. c. Taxable Basis is selected as the default one for tax1 as the Transaction Line amount is only basis for the Tax.

10. Set Tax Rules for the Tax2. a. Tax Applicability by default is Not Applicable. It is made applicable using the same Tax Condition set of Tax1. Hence, this tax will get calculated only if Tax1 is calculated. b. Tax Rate of Tax2 is also linked to Tax Condition Set of Tax1. c. Tax formula created needs to be selected for Taxable Basis for tax2 as the basis for Tax2 will be Transaction Line amount and Tax1. d. Default Tax calculation formula needs to be selected as Standard_TC. (Test Rule created for tax calculation is strike out in below screenshot)

Setups for Tax Set2. 11. We have all similar setups for Tax set2, creating tax condition set using Tax rate of Tax Set2. Only change is the Tax basis formula where the Tax2 is calculated on previous tax1 (not including the line amount). We select the Taxable Basis Type as Prior Tax for this requirement.