brotherton-erpnext/erpnext/docs/user/manual/en/accounts/setup/tax-rule.md

You can define which Tax Template must be applied on a Sales / Purchase transaction using Tax Rule.

You can define Tax Rules for Sales or Purchase Taxes. While making a Transaction the system will select and apply tax template based on the tax rule defined. The system selects Tax Rule with maximum matching Filters.

Let us consider a senario to understand Tax Rule Better.

Suppose we define 2 Tax Rules as below.

Here Tax Rule 1 has Billing Country as India and Tax Rule 2 has Billing Country as United Kingdom

Now supposed we try to create a Sales Order for a customer whose default Billing Country is India, system shall select Tax Rule 1. In case the customers Billing Country was United Kingdom, the system would have selected Tax Rule 2.