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Output tax credit or output tax set-off is a system in which businesses can set off the GST collected (output tax) against the GST paid (input tax). In other words, it allows businesses to adjust or deduct the GST already paid on purchases from the GST they owe to the government on sales. In this guide, we will learn about what is output tax, the calculation of output tax credit, and the benefits of output tax.
Output tax liability has been defined under section 2(82) of the CGST Act. It refers to the money that a business owes to the government for the sale of taxable goods and services. This amount is supposed to be collected by the government at the time of sale.
For example, if you are a registered business involved in selling laptops worth Rs.50,000 each and the rate of GST on laptops is 18%. Then the amount of output tax will be - Rs.50,000 x 18% = Rs.9,000 each.
The calculation of output tax liability under GST is very easy and straightforward. Here’s the Formula for the computation of output tax liability -
Output Tax Liability = Total Taxable Value of Goods Supply x GST Rate
Let’s understand with an example: If you sold ten fridges worth Rs.50,000 each. Then, the total taxable value of goods sold should be Rs.5,00,000. The output tax liability will be Rs.90,000 (Rs.5,00,000 x 18%).
Input Tax Credit refers to the credit earned by businesses for the tax paid on the inputs or services that are used in the service or production. For example, if you purchase software for your company worth Rs. 30,000 and pay a GST of Rs.5,400 (Rs.30,000 x 18%). This Rs.5,400 is your input tax credit. You can use this credit to set off future tax liabilities.
The method of calculating Input Tax Credit is very simple. All you have to do is multiply the total taxable value of your business-related purchases with the GST rate.
Input Tax Credit = Total Taxable Value of Inputs x GST Rate
Let’s understand this with an example: If you bought raw materials for your business production worth Rs.2,00,000, then the input tax credit will be Rs.36,000 (Rs.2,00,000 x 18%).
Tax due refers to the amount you have to pay to the government after adjusting your output tax liability with your input tax credit. In simple terms, it is the difference between the taxes collected by you and the tax credits available to you. Here’s the formula for the computation of tax liability.
Tax Payable/Tax Due - Output Tax Liability - Input Tax Credit
Therefore, in the above examples, your net tax payable will be the difference between output tax liability and input tax credit. Output tax liability is Rs.90,000, and the input tax credit is Rs.36,000. Therefore, the tax due will be Rs.54,000.
| Particulars | Input Tax Credit | Output Tax Liability |
|---|---|---|
| Nature | Tax Credit received on purchases | Tax owed to the government on sales |
| Applicability | Is applicable to Purchased and Imported products | Is applicable to Sales and Supplies |
| Basis of calculation | Credits earned against the GST paid on inputs | GST on output owed to the government |
| Adjustment | Reduces Output Tax | Offset by Input Tax |
No, output tax liability cannot be negative as it refers to the amount of tax you owe to the government. It should be either ‘0’ or positive in nature. This amount should be paid to the government and can also be adjusted against the input tax credit due for the year.
If you have an excess input tax credit over your output tax liability, you can do any of the following -
Output tax liability is required to be reported in the quarterly or monthly GST returns submitted by you. It is important to report your tax liability accurately to avoid any tax liability.
