Magento - Understanding Calculation settings under tax tab in Admin configuration page - magento

Question

I am going through the admin panel of magento understanding each field in detail before traversing to next. I got stuck at these two fields(dropdowns) which says
Apply Customer Tax : i) before discount, ii) after discount
Apply Discount On Prices: i) excluding tax, ii) including tax
Let's say we opted for "after discount" for question 1, apply customer tax. This means First Discount, Next Tax, which indirectly means "Apply discount on prices" -> "excluding tax".
In short, question 1 indirectly talks of question 2. What is the necessity of question 2. If they are not dependent please give some realtime examples. Thanks.

Answer 1

Apply Customer Tax -
From this option you can select whether the tax should be applied before or after a discount. By default, it's set to Before Discount. If you want the tax to be applied after a discount has been applied, just select After Discount. This, of course, will have an effect on the final price.
Let's illustrate it with an example. For instance, let's assume that the tax is applied before the discount, the tax is 10 percent and a customer orders a product that costs 100 dollars; this makes the total price with tax 110. The customer has a coupon for 10 percent discount and applies it which makes the final price 100 dollars (the discount is applied on the original price of the product excluding the tax). Now if we set the Apply Customer Tax drop-down to After Discount and we use the same example the final price will be 99 dollars because the 10 percent tax is applied on the price after the discount, which in this case is 90 dollars (100 dollars original price minus 10 percent discount).
Apply Discount On Prices -
By default, discounts are applied to the original price of the order before the tax is applied. If you select Including Tax, the discount will be applied after the tax is applied to the original price. This setting is connected with the previous one.
Check the description of the previous setting to see an example of how both settings work together when the Apply Discount On Prices option is set to Excluding Tax and the Apply Customer Tax option is set to Before Discount and After Discount.
Now we'll use the same example to illustrate what happens when you change Apply Discount On Prices to Including Tax. So the ordered product is 100 dollars, the tax is 10 % and and the customer applies a coupon for 10 % discount. When the Apply Customer Tax option is set to Before Discount, the tax of 10 % will be applied to the original price of $100 which makes the total taxed price $110. The discount of 10 % is applied to this amount because the Apply Discount On Prices option is set to Including Tax; 10 % of 110 is 11, so the final amount is $99. In the same situation if we change the Apply Customer Tax option to After Discount, the grand total would be $97.90. The discount has to be applied on the taxed price which is a total of $110 ($100 original price + 10 % tax), and since the discount is 10 % that makes the discount sum $11 (10 % of $110), but the tax itself actually has to be applied after the discount is applied to the original price ($100 original price - $11 discount = $89). This make the final tax amount $8.9 (with 10 % tax) which makes the grand total 97.90 ($89 discounted price + $8.9 tax = $97.90).
For more detail please check this link
Magento System Tax Settings