Tax Configuration in Magento helps to set tax, with different product class.
You can decide here, how you want to show prices of product on Catalog page or Shopping Cart page, with including tax or excluding tax. These all setting we will done from

Step 1: Process to Tax Selection

System>Configuration>Tax

product tax class 1

  • Tax Classes:

    Select from Drop-down, Tax class to which, you will apply tax. It is the product tax class that you already created.

For example, In above screen-shot, Taxable Goods is selected.

Step 2: Calculation Setting:
Tax calculation method 2

    • Tax Calculation Method Based on:
      • Row Total: Here, tax will calculate for each row separately
      • Total: Tax will calculate to whole total of ordered product
      • Unit Price: Tax will calculate on the basis of unit price of each line
    • Tax calculation based on:

Select from drop-down on what basis you want to calculate tax, that is

      • Billing Address: It will calculate tax on the basis of your Billing Address location where you want to billing of this product.
      • Shipping Address: Tax will calculate by considering your shipping address location.
      • Shipping Origin: Tax will calculate from your shipping origin.
    • Catalog Prices
      • Including Tax: It will display price at catalog with tax
      • Excluding Tax: It will display price at catalog without tax
    • Shopping Cart Prices:
      • Including Tax: Shopping cart price will display including tax
      • Excluding Tax: Shopping cart price without tax
    • Apply Customer Tax:

Select from Drop-down, whether tax will apply Before discount or After discount

    • Apply Discount on Prices:

Set whether discount applied with Including or Excluding tax.

    • Apply tax on:

Set to apply tax on original price or Custom price if available.

Step 3: Tax Destination Calculation
tax destination 3

Default Country: Set default country where the tax applies

Default State: Set default State where the tax applies. This option is not set, it indicated by Asterisk(*)

Default Post Code: Set default Post Code where the tax applies. By default it is not set. It indicated by Asterisk(*)

Step 4: Price Display setting
price catalog 4

Display prices in Catalog:

  • Including Tax: Display prices with tax
  • Excluding Tax: Display prices without tax
  • Including and Excluding tax: Prices display with both Including and Excluding tax

Display Shipping Prices:

  • Including Tax: Display shipping prices with tax
  • Excluding Tax: Display shipping prices without tax
  • Including and Excluding tax: Shipping Prices display with both Including and Excluding tax

Step 5: Shopping cart display Setting
shop cart tax 5

Display Price:

  • Including Tax: Display shopping cart prices with tax
  • Excluding Tax: Display shopping cart prices without tax
  • Including and Excluding tax: Shopping cart Prices display with both Including and Excluding tax

Display Subtotal:

  • Including Tax: Display subtotal with including tax
  • Excluding Tax: Display subtotal without tax
  • Including and Excluding tax: Subtotal display with both Including and Excluding tax

Display Shipping Amount:

  • Including Tax: Display shipping prices with tax
  • Excluding Tax: Display shipping prices without tax
  • Including and Excluding tax: Shipping Prices display with both Including and Excluding tax

Include tax in grand total: Set yes to include tax in Grand total, otherwise tax not included in Grant Total.

Display full tax summary:

If set Yes tax summary display on shopping cart.

If set No tax summary will not display on shopping cart

Display Zero tax Subtotal: If set yes it display orders with zero tax. If it is No, does not display orders with zero tax

Step 6: Order, Invoices, Credit Memos Display Setting
order invoices 6

Display Price:

  • Including Tax: Display prices with tax
  • Excluding Tax: Display prices without tax
  • Including and Excluding tax: Prices display with both Including and Excluding tax

Display Subtotal:

  • Including Tax: Display Subtotal with tax
  • Excluding Tax: Display Subtotal without tax
  • Including and Excluding tax: Subtotal with both Including and Excluding tax

Display Shipping Amount:

  • Including Tax: Display shipping prices with tax
  • Excluding Tax: Display shipping prices without tax
  • Including and Excluding tax: Shipping Prices display with both Including and Excluding tax

Include tax in grand total: Set yes to include tax in Grand total, otherwise it is not included

Display full tax summary: If set yes tax summary display on shopping cart, otherwise it is not display

Display Zero tax Subtotal: If set yes it display orders with zero tax. If it is No, does not display orders with zero tax.

Step 7: Save Configuration

Step 8: Tax display at Shopping Cart
shopping cart disp tax 7

In above screen-shot tax, tax is displayed with excluding tax with grand total and Including tax with grand total.

Step 9: Tax During Checkout:
Order tax disp 8

Tax will display according to your setting configuration.