Input and Output Tax

Input and Output taxes are taxes that are paid at the time of exchange of goods and are used to determine the sales tax payable at the end of the tax month.

Input tax is the tax paid by a registered person at the time of purchase of a certain good whereas output tax is the tax received by a registered person at the time of sale of goods which has to be paid to the government in the month the tax is collected. The amount payable by a registered person to the government for the month is determined by calculating the difference between the Input Tax and the Output Tax of the said month.

Tax liability = Output Tax – Input Tax

For example, if person A buys a good valued at Rs 118,000/- in September which includes the value of the good (100,000) and 18% sales tax levied upon it (18,000), his input tax comes out to be Rs 18,000/-. In the same month, person A sells the same good for Rs 236,000/- which includes the value of the good (200,000) and the 18% sales tax levied upon it (36,000) which makes his output tax to be Rs 36,000/-. It can be clearly seen that the tax he has already paid at the time of purchase aka Input tax is Rs 18,000/- whereas the tax that he is supposed to pay to the government aka Output tax is Rs 36,000/-. Person A’s tax liability for the month of September will come out to be Rs 18,000/- since he has already paid Rs 18,000/- from his total tax liability of Rs 36,000/- at the time of purchase of goods.

This is just an overall concept of Input and Output tax concerning just one transaction as an example whereas in real life scenarios, thousands of such transactions are used to compute the person’s tax liability for the month.