What is Output Tax Credit Under GST? Meaning & Example

Understanding the nuances of GST can often seem overwhelming, especially when there's confusion around terms like "output tax credit." It's essential to note that the correct terminology is actually "input tax credit." Mastering key elements like input tax credit and output tax liability is indispensable, and this article aims to clarify these topics. 

Output Tax in GST with Example

Output Tax Liability, as defined in Section 2(82) of the CGST Act, refers to the money a business owes to the government for selling taxable goods and services. This amount is usually collected from customers at the time of sale. For example, if you're a registered business selling laptops at Rs.50,000 each and the GST rate is 18%, your output tax for each laptop sold would be Rs.9,000 (50,000 x 0.18).

How to Compute Output Tax Liability

When it comes to computing output tax liability under GST, the operation is surprisingly straightforward. You take the taxable value of the goods or services sold and perform a simple multiplication with the GST rate. 

Output Tax Liability = Total Taxable Value of Supply (×) GST Rate 

So, if you sold 10 laptops at Rs.50,000 each, the total taxable value would be Rs.500,000. With an 18% GST rate and total sales of Rs. 500,000, your output tax liability would be Rs.90,000, calculated as 500,000 x 0.18.

What is Input Tax Credit in GST with Example

Input Tax Credit (ITC) is the tax credit businesses earn for the tax paid on inputs and services used in production or service provision. Let’s consider an example: you purchase a set of software license's for your company at Rs.10,000 and pay a GST of 18%, which amounts to Rs.1,800. That Rs.1,800 becomes your input tax credit, which you can use to offset future tax liabilities.

How to Compute Input Tax Credit

To calculate ITC, multiply the GST rate by the total taxable value of your business purchases. The formula is simple.

Input Tax Credit = Total Taxable Value of Inputs (×) GST Rate

So if you bought raw materials for Rs.100,000 at a GST rate of 18%, your input tax credit would be Rs.18,000 (100,000 x 0.18).

What is Tax Due/Tax Liability/Tax Payable

Tax due is the amount you owe to the government after adjusting your output tax liability with your input tax credit. Essentially, it's the difference between the taxes you collect and the tax credits you've accumulated. Here's how you can calculate it:

Tax Due (or Tax Payable) = Output Tax Liability (−) Input Tax Credit

For instance, if your output tax liability for the month is Rs.90,000 and you have an input tax credit of Rs.18,000, your net tax payable or tax due would be Rs.72,000 (90,000 - 18,000).

Differences between Input Tax Credit and Output Tax Liability in GST

FAQs on Output Tax Liability

Is Output Tax Liability Adjusted with Input Tax Credit?

Yes, businesses can offset their Output Tax Liability using available Input Tax Credit, thus reducing the net tax payable to the government.

Can Output Tax Liability be Negative?

No, Output Tax Liability cannot be negative. It's the amount you owe to the government, which should either be zero or a positive amount that needs to be paid.

What Happens if There is an Excess of Input Tax Credit Over Output Tax?

If you have more Input Tax Credit than Output Tax Liability, you can carry forward the excess credit to the next tax period or apply for a refund, depending on the GST rules.

How is Output Tax Liability Reported?

Output Tax Liability is typically reported in the monthly or quarterly GST returns you submit. Accurate reporting is crucial to avoid penalties or legal consequences.

Is Output Tax Liability the Same Across All Types of Goods and Services?

The GST rate affects the Output Tax Liability, which varies depending on the category of goods or services being sold. Always refer to the most recent GST rate schedule.