An overview of output tax credit under the GST regime

Businesses are required to pay Goods and Services Tax (GST) on the value of goods and services sold. This is an important part of their tax liability and is mandatory. However, various provisions under the GST Act, such as output tax credit, allow businesses to reduce their GST liability. Let's find out more about output tax credit under GST and how it helps businesses.

• GST output tax is paid on the sale of goods and services
• Output tax credit reduces GST liability by offsetting it against the GST or input tax paid
• The reduced GST liability from the output tax credit can be passed on to end-consumers as reduced prices on products or services

Output tax credit, also commonly referred to as output tax set-off, is a taxation system that allows you to write off the GST collected or the output tax against the GST paid or the input tax. Simply put, it lets you adjust or deduct the GST paid by you on all your input purchases from the GST you owe to the government on your sales.

Output tax liability, as per sec 2(82) of the CGST Act, refers to the amount that you owe to the government against the sale of goods and services made by your business. The government usually collects the tax amount at the point of sale.GST output tax liability is calculated using the following formula:

Output tax liability = total taxable value of supply * applicable GST rate

For instance, if you have sold a product for ₹20,00,000 and the applicable GST on the same is 18%, then you have to pay an output tax amounting to ₹20,00,000*18% = ₹3,60,000. Also Read: Input Tax Credit under GST - How to Claim & What is ITC?

Some of the major features of output tax credit are as follows:

• It levies tax only on the total amount of sale value at every stage of sale. It does not re-consider the original sale value of the product while levying tax.
• It allows you to offset your input tax credit against your output tax liability.
• It helps you to maintain a proper book of accounts in compliance with the provisions of GST.
• It helps in passing on the reduced GST liability to consumers through reduced prices.

The benefits of output tax credit can be enumerated as given below:

Prevents double taxation effect

Double taxation occurs when a product already taxed by the government is re-taxed. Output tax credit plays a very crucial role in mitigating this effect. It ensures that tax is charged only on the value-added amount at different stages of the sale and not on the original value of the already sold product.

Reduction in the tax liability

If you own a business with a considerable amount of input tax credits, then the output tax credit I s highly beneficial for you. It helps reduce your liabilities by letting you write-off your input tax credits against tax liabilities.

Output tax credit

helps you claim credits effectively by matching your sales with purchases. It does so by issuing directives on maintaining a proper account in compliance with the applicable GST provisions.

Cost-Effective

The provision of output tax credit is cost-effective as the GST input benefits are passed on to the consumers in the form of reduced prices.

Competitive Advantage

Proper utilisation of the output tax credit system helps you gain a competitive advantage as it lets you offer products at a comparatively lower rate than other businesses.

If you own a business, it is important to understand what is output tax credit and how you can use it to reduce your tax liability. Remember to file your GST returns correctly and in time to avoid penalties, and run your business smoothly.