What is Output Tax Credit Under GST? Meaning and Example (2024)

What is Output Tax in GST?

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.

What are the Benefits of Output Tax Credit?

• Prevents Double Taxation - Output tax credit prevents the cascading effect of taxes in which tax is calculated on the already paid tax amount. This system makes sure that tax is levied only on the value added at each stage and not levied twice on the same value of the product.
• Reduces Tax Liability - It also helps businesses claim an input tax credit and adjust it with the output tax credit to reduce the overall tax liability. This is extremely beneficial for businesses having significant amounts of input tax credits.
• Helps Maintain Compliance - Output tax credit motivates businesses to maintain proper books of accounts and ensure compliance with the provisions of GST. This is required because businesses need to match their sales and purchases to claim credit.
• More Cost Efficient - It is a cost-efficient method as the GST paid on inputs can be passed on to the consumers in the form of reduced prices.
• Provides Competitive Advantage - Businesses that utilize the output tax credit facility can provide lower prices to their customers and gain a competitive advantage over others.

How is Output Tax Liability Calculated?

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%).

What is the Input Tax Credit in GST?

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.

How to Calculate Input Tax Credit?

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%).

What is the Tax Liability/Tax Payable?

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.

What is the Difference Between Output Tax Credit and Input Tax Credit?