The Goods and Services Tax has made fundamental changes in how firms calculate their tax liability. The GSTR-4 return form applies to all Composition Scheme registered taxpayers. Accurately estimating output tax liability in GSTR-4 Part 2 will be mandatory to avoid penalties and compliance issues.
This comprehensive guide covers key aspects of output tax calculations in GSTR-4 Part 2 using simple examples and procedures. Read on to learn effective strategies and best practices when determining your output tax obligations.
Calculating Output Tax Liability In GSTR-4 Part 2:
The output tax liability refers to the total GST that a composition scheme dealer is required to pay on their outward taxable supplies. It will be a pivotal part of GSTR-4, which is the quarterly return that composition dealers need to file under Goods and Services Tax.
The output tax liability gets auto-calculated in GSTR-4 Part 2 based on the taxable turnover disclosed by the composition dealer. It needs to be paid every quarter along with the return filing.
The output liability would comprise applicable SGST, CGST, or IGST charged on the customer invoices raised by the composition dealer. The scheme rate to be applied could be 1%, 5%, or 6%, depending on the goods or services supplied by the dealer.
The output calculation must consider all B2B and B2C taxable outward supply transactions undertaken. Any subsequent adjustments, like credit notes, debit notes issued, or discounts provided, that impact the taxable value realization also need to be reflected in the output computation.
The key challenge is to accurately estimate the taxable turnover on which the prescribed composition scheme rate would be applied to generate the output liability. Dealers need to carefully segregate exempted, nil-rated, and non-GST turnover to avoid errors.
The key things to remember when calculating output tax liability are:
- It applies only to Composition taxpayers filing GSTR-4
- It involves estimating tax at the prescribed Composition tax rates
- It covers tax collected on all taxable outward supplies
- The period follows the relevant financial year
Formulas And Procedures For Accurate Calculation:
The basic formula to calculate output tax liability is to multiply turnover with the composition tax rate.
Output Tax = Turnover x Composition Tax Rate
The key thing here is that turnover refers to taxable outward supplies only.
- For example, Raj Flower Shop opted for the 5% composition scheme. His taxable supplies under GST for FY 2022-23 are INR 20 lakhs.
His output tax will be:
Taxable Turnover = INR 20 lakhs
Composition Rate = 5%
Output Tax = INR 20 lakhs x 5% = INR 1 Lakh
Based on his taxable turnover and scheme rate, Raj’s output liability is INR 1 lakh for that financial year.
Let’s look at some other examples with distinct composition rates.
Composition Scheme Rates:
There are different composition schemes applicable based on your sector:
- 1% – Traders and manufacturers (except restaurant services, etc.)
- 5% – Restaurant services along with outdoor catering
- 6% – Food stuff put up in unit containers packed before or after-sale
For instance, Priya Foods opts for the 1% scheme rate as a manufacturer.
Taxable Turnover in FY 2022-23 = INR 60 Lakhs
Output Tax = Turnover x Scheme Rate
= INR 60 Lakhs x 1%
= INR 60,000
So Priya Foods will declare INR 60,000 as output tax in Table 5 of GSTR-4.
Exempt, Nil-rated, And Non-GST Supplies:
Only taxable outward supplies need to be considered in output tax calculations. The following types of supplies should not be counted:
- Exempt supplies: No tax charged on such supplies
- Nil-rated supplies: The tax rate is 0%.
- Non-GST supplies – Outside the scope of GST.
For instance, Harish Stores registered under the Composition Scheme will share this data:
- Taxable supplies – INR 15 lakhs
- Exempt sales – INR 10 lakhs
- Nil-rated supplies – INR 8 lakhs
Tax will need to be calculated only on the taxable supplies:
i.e. INR 15 lakhs x Scheme Rate
The remaining INR 18 lakhs of Exempt + Nil Supplies are excluded.
Adjustments For Credits Or Debits:
Any credit notes or debit notes issued should also adjust the taxable turnover amount:
- Credit notes reduce turnover, thus reducing output tax
- Debit notes increase turnover, thereby increasing tax
Let’s take M/s Raghav Industries for instance:
Taxable Turnover – INR 40 lakhs
Scheme rate – 1%
Initial output tax = INR 40 lakhs x 1% = INR 40,000
However, credit notes of INR 5 lakhs were issued in that financial year.
Adjusted Taxable Turnover = INR 40 lakhs – INR 5 lakhs = INR 35 lakhs
Revised Output Tax = INR 35 lakhs x 1% = INR 35,000
So the credit notes issued reduced tax liability by INR 5,000. Debit notes will have the opposite effect.
Compliance Standards For Output Tax In GSTR-4 Part 2:
To remain compliant, taxpayers should:
- Use Government approved GST software for tax calculations
- Match GSTR-1 outward supplies and GSTR-4 tax amount figures
- Ensure tax is never over or under-reported intentionally
- Revise GSTR-4 in case of any changes to turnover post-filing
- Disclose amended tax liability via credit or debit notes, if applicable
Intended tax evasion can impose heavy fines and penalties. Common GST violations include:
- Under-reporting tax payable in returns
- Wrong classification of goods/services
- Non-issuance of invoices
- Incorrect details provided in GST returns
Periodic tax audits by authorities are also carried out to verify compliance.
Maintaining diligent accounts and documents helps avoid penalties in cases of audits.
Strategies For Efficient Output Tax Calculations:
Here are some detailed strategies that can help composition dealers efficiently calculate their output tax liability for GSTR-4:
Maintain A Separate Sales Register:
Composition dealers should maintain a distinct itemized sales register to capture details of all taxable, exempted, and nil-rated outward supplies separately. It will help in accurately estimating turnover eligible for tax calculation.
Reconcile Books And Returns Regularly:
Dealers should ensure to thoroughly reconcile annual financial statements with quarterly filed GSTR-4 returns to ensure consistency in taxable figures declared across documents. Any gaps must be addressed urgently.
Leverage Technology Integration:
Integration of billing systems and accounting software with GST return filing tools can limit manual errors in tax liability determination through seamless data flows across systems.
Build Tax Review Procedures:
Putting in place frequent tax review procedures for validating declared output tax against purchase registers, input tax credits claimed, etc. improves compliance.
Standardize Policies And Processes:
Documenting standardized guidelines, validation rules, and operating procedures for key processes assists in uniform tax computation.
Seeking Tax Expert Assistance:
Availing the services of competent tax experts on a retained or advisory basis helps resolve complex tax assessment issues and ambiguities and builds capabilities.
Staying updated on the latest GST updates through notifications and circulars helps account for accurate scheme eligibility and tax rates in output calculations.
Legal Considerations In Output Tax Liability For GSTR-4 Part 2:
Some key legal aspects dealers should consider around output tax include ensuring invoice-level compliance with the place of supply, valid GSTIN mentioned, etc. All eligibility conditions prescribed need to be fulfilled to legally avail of composition scheme benefits. Only the defined tax rates and exemptions should be applied to taxable outward supplies. Determining the time of supply will be pivotal to assessing applicable tax rates and due date considerations for discharge and filings. Intentional under-reporting of turnover or taxes is an offense leading to penalties.
Certain common legal issues around output tax include:
Any registered person who intentionally evades tax or assists in evading tax will be fined ₹10,000 – ₹100,000 and face imprisonment up to 5 years.
Issuing False Documents:
Issuing an incorrect or false invoice, bill, or document to enable tax evasion can impose heavy fines or jail time.
Non-Filing Of Returns:
Not filing six or more GST returns during any financial year will lead to the compulsory cancellation of GST registration.
Unlawful Collection Of Tax:
Collecting taxes on exempt supplies or at rates not prescribed will be unlawful. Charges can apply for non-compliance.
Tax officers can impose penalties of up to ₹25,000 for even minor offenses per the GST Act. Accurate tax liability declarations also help avoid such complications.
Maximizing Benefits In Accurate Output Tax Assessments:
Claim Eligible Input Tax Credit:
Composition dealers should carefully assess and claim any input tax credit available and eligible for set-off. Reporting it in GSTR-4 will ensure it gets carried forward for claiming in subsequent tax periods. It will directly boost working capital availability.
Utilize Tax Exemptions:
Dealers should tap into legally prescribed exemptions on certain goods and services under the composition scheme. It will reduce their overall tax incidence and boost profit margins.
Enhance Cash Flow Visibility:
Maintaining an updated purchase register and capturing tax components helps composition dealers effectively plan their finances and cash flow needs.
Claim Tax Refunds:
In cases where excess taxes have been paid, composition taxpayers can explore provisions to either claim refunds directly or adjust against other indirect tax liabilities through rebate settlement.
Optimize Working Capital:
With clear visibility on tax components and liabilities through accurate data maintenance, dealers can make informed decisions on working capital deployment aligned with tax outflows.
Correct computation and reporting of output tax in GSTR-4 will help composition dealers prevent breaches of crucial composition scheme thresholds and tax provisions. It will retain eligibility for the beneficial scheme.
In a nutshell, precision in output tax analysis and reconciliation will directly benefit composition dealers through operational efficiencies, tax savings, and strengthened compliance.
Determining output tax obligations under the composition scheme will include several pivotal considerations. It will be mandatory to focus on taxable turnover, apply the perfect slab rates, and adjust for credit and debit notes. Excluding exempt, nil-rated, and non-GST sales will help maintain data discipline and leverage technology. Accurate GSTR-4 estimation will be a key component to avoid penalties. Partnering with GST advisors will smooth compliance and ensure a confident approach to navigating regulations.
Proactive engagement with professional advice will not only limit risks but also boost overall compliance efficiency. By adhering to these guidelines and seeking expert support, firms can navigate the complexities of output tax obligations with higher ease and confidence.