Output Tax Liability Under GST: Understanding the Calculations and Key Components

As per Section 2(82) of the CGST Act, 2017, “Output Tax in relation to a taxable person means the tax chargeable under this Act on taxable supplies of goods or services (or both) made by him or her by their agent, excluding the tax payable under the reverse charge mechanism.” Simply put, output tax refers to the tax levied on outward supplies of goods and services. The supplier collects the tax amount from the buyer and pays it to the Government. Since the supplier is responsible for paying this tax to the Government, it is an Output Tax Liability for the supplier.

Understanding output tax liability requires knowledge of several related concepts like Input Tax Credit (ITC), Reverse Charge Mechanism (RCM) etc. Therefore, in this blog, we will break down the essential components that contribute to calculating output tax liability.

Key Considerations to Determine Output Tax Liability

Under GST law, output tax liability arises when a registered taxable person supplies taxable goods or services. Hence, for the calculation of output tax liability, it’s essential to address the following key questions:

The seller calculates GST to be collected from the buyer by applying the applicable GST rate on the taxable value of goods or services. Thereafter, the collected tax is payable to the Government. Hence, even if the supplier pays the tax, the ultimate bearer of output tax liability is the buyer or the final consumer.

Components of GST Liability

Depending on the nature of the transaction, the GST collected from the buyer is payable in different forms: IGST, CGST, and SGST. Let’s understand each of these components:

Tax Rates under GST

GST is levied at different rates depending on the classification of goods and services. The rates applicable are 0%, 5%, 12%, 18% and 28%.

All goods and services taxable under GST are classified using unique codes: HSN (Harmonized System of Nomenclature) codes for goods and SAC (Services Accounting Code) for services. Therefore, identifying the correct classification of goods and services is essential for applying the correct GST rate, which directly impacts the calculation of output tax liability.

Calculation of Output Tax Liability

Calculating output tax liability involves multiple steps, but here is a more detailed and simplified framework to help understand the process:

Part I: Calculation of Individual Components of GST Liability

Part II: Calculation of Net Tax Liability payable through e-cash ledger

Role of Reverse Charge Mechanism (RCM) in Calculation of Output Tax Liability

Under the normal tax charge mechanism, the supplier of goods or services collects GST from the recipient and deposits it with the Government. However, under the Reverse Charge Mechanism (RCM), the recipient of goods and services, instead of the supplier, is responsible for depositing GST with the Government. This adds to the total output tax liability of the recipient. However, the recipient also receives ITC on the GST paid under reverse charge in the subsequent month.

Some examples of goods and services on which Reverse Charge Mechanism applies:

• Supply of raw cotton by an agriculturist to a registered person.
• Legal services provided by an advocate or advocate firm to a business entity in a taxable territory.

In both cases, the buyer is liable to pay GST under the Reverse Charge Mechanism (RCM) through the electronic cash ledger. To learn more about the provisions of RCM, refer to Sections 9(3), 9(4), and 9(5) of the CGST and SGST Acts, which govern the Reverse Charge Mechanism.

Input Tax Credit (ITC) and Its Role in Output Tax Liability

Input Tax Credit (ITC) under GST allows businesses to offset the tax paid on purchases against their final output tax liability. As per Section 16 of the CGST Act, 2017, businesses can claim ITC on GST paid on purchases if these supplies are used in the course of business. Hence, ITC is an important component in the calculation of final output tax liability

Conditions for availing of ITC include:

1. The supplier must report the invoice details in GSTR-1, and it should reflect in the recipient’s GSTR-2B.

2. The supplier must have paid the tax to the Government.

3. The buyer must file the return under Section 39 to avail of ITC.

Rules for Utilization of ITC for Output Tax Liability

The Input Tax Credit (ITC) must be set off in a specific order against the output tax liability. Sections 49A and 49B of the CGST Act, 2017, along with Rule 88A of the CGST Rules, 2017, provide clear guidelines on the utilization of ITC against the output tax liability.

(i) Set off the ITC of IGST first against the IGST liability, and then against the CGST and SGST liabilities in any proportion.

(ii) Fully utilize the ITC of IGST before using the ITC of CGST and SGST.

(iii) Use CGST credit first to set off the CGST liability, and then against IGST liability. Setting off against SGST is not allowed.

(iv) Utilize SGST credit first to set off the SGST liability, and then the IGST liability. Set off against CGST is not allowed.

Calculation of Output Tax Liability in Case of Composition Scheme

A composition dealer pays tax by applying a specific rate on total sales. However, the composition dealer cannot set off input tax credit against the final tax liability. In addition, the composition dealer must pay tax under reverse charge at normal GST rates, but the input tax credit for tax paid under reverse charge is also not available to them.

Payment of Output Tax Liability

Payment of taxes under GST is done using challan generated through GST portal. Generally, PMT-06 challan is used for making payment of tax, interest, late fee and penalty under GST. To generate the challan from GST portal taxpayers or their GST consultants can use the following path – ‘Services’ > ‘Payments’ > ‘Create Challan’ buttons. Login is not mandatory on the portal to generate challan.

Reporting of Output Tax Liability

Payment of taxes alone is not sufficient. In addition, a registered person must also file GST returns to show how they arrived at the final amount of tax liability. Also, it helps in passing on the benefit of ITC to the buyers. Following are the important returns that a registered person should file to report their tax liabilities:

1. GSTR-1

In GSTR-1, a supplier reports all its outward supplies of goods and services. It includes all the invoices and debit/credit notes for a given tax period. It applies to all registered taxpayers including casual taxable persons. GSTR-1 is filed either monthly or quarterly.

2. GSTR-3B

GSTR-3B is a monthly or quarterly self-declaration return. It contains essential information like summary of outward supplies, input tax credit, final tax liability and taxes paid.

3. CMP-08/GSTR-4 Return

Dealers under the composition scheme must file Form CMP-08 quarterly to report their tax liability and make payments. Additionally, they must file Form GSTR-4 annually by April 30th, following the end of financial year.

The Role of Automated GST software

Accurate calculation of output tax liability is essential for compliance, avoiding rework, and preventing notices from the GST department. Also, it ensures the right input tax credit flows through the GST chain. GST software can simplify this process with features like automated challan creation, payment tracking, and precise tax calculations, making filing quick and error-free. Additionally, these tools reduce manual work and errors, helping businesses stay compliant without the constant worry of tax issues. Hence, investing in the right GST software is essential not only to boost efficiency but also to build confidence in accurate tax reporting and filing.

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