Output tax
Output tax is the value-added tax due on sale or lease of taxable goods or real estates or services by any person registered or required to register under the VAT system [1]. In the calculation, output tax is taxable sales multiplied by the tax rate, and input credits consist of both VAT on taxable imports listed on import documents and VAT on taxable local purchases listed on VAT invoices. Input credits for tax on imports and purchases are allowed only to the extent that the business inputs are used in making taxable sales. In several countries, such as sales within the EU, imports of goods are not taxed at the border but are reported and paid as output tax in the tax period in which the goods are imported, generally with an off-setting input credit [2].
Example of Output tax
Output tax is used when a business is providing goods and services to customers. It is typically used when the customer is not registered for VAT, or when the goods and services are exempt from VAT. Output tax is also used when a business is registered for VAT, but the goods and services are not eligible for the reduced rate of VAT.
- Value Added Tax (VAT): Value Added Tax (VAT) is a type of consumption tax that is applied to the sale of goods and services in many countries. It is usually charged as a percentage of the sale price, and the rate of VAT varies from one country to another. It is typically collected by the business, and then paid to the government.
- Sales Tax: Sales Tax is another type of output tax that is charged on the sale of goods and services. It is typically calculated as a percentage of the sale price, and the rate of Sales Tax varies from one jurisdiction to another. As with VAT, it is usually collected by the business and then paid to the government.
Formula of Output tax
The formula for calculating Output Tax is as follows:
- Output Tax = Total Value of Goods and Services x Output Tax Rate
Where "Total Value of Goods and Services" is the total value of the goods and services provided by the business, and "Output Tax Rate" is the rate of tax due. Output Tax Rate is usually the same for all businesses.
Differences between output tax and input tax
Output tax is taxable sales multiplied by the applicable VAT rate. Input tax is the VAT paid on taxable business purchases of inputs used in making taxable sales. A credit-invoice VAT thus relies on explicit charges for sales to calculated output tax. If the output tax exceeds the input tax at the end of any quarter, the excess shall be paid by the VAT-registered person representing his VAT payable to the BIR [3].
Credit-invoice method
We have three alternative methods of calculation VAT: the credit method, the subtraction method, and the addition method. Under the credit method, the firm calculates the VAT to be remitted to the government by two-step process. First step, the firm multiplies its sales by the tax rate to calculate VAT collected on sales. Second step, the firm credits VAT paid on inputs against VAT collected on sales and remits this difference to the government. The firm calculates its VAT liability before setting its prices in orders to fully shift the VAT to the buyer. Under the credit-invoice method, a type of credit method, the firm is required to show VAT separately on all sales invoices and to calculate the VAT credit on inputs by adding all VAT shown on purchase invoices [4]. A lot of countries with VATs rely on the credit-invoice method, of calculating periodic tax liability. Registered business in most countries must report as output tax the tax on taxable sales taken from tax invoices. They claim as input credits the VAT charged on purchases used in making taxable sales. Businesses with turnover below the registration threshold are outside the VAT system. To ease the compliance burden on smaller businesses that are above the threshold but may not have sophisticated or computerized record keeping the VAT, by law, regulations, or administrative practice, may authorize simplified schemes to minimize VAT record keeping and reporting obligations [5].
Tax in mathematical terms
Taxes calculation [6]:
- Output tax - Input tax = VAT liability (if output tax is greater than input tax)
- Input tax - Output tax = Amount due from SARS (if input tax is greater than output tax)
Advantages of Output tax
There are several advantages to Output tax:
- It can help businesses to reduce their overall tax burden by reducing the amount of Income Tax they have to pay on their profits.
- It helps to ensure that businesses pay a fair amount of tax on their sales, regardless of the size of their profits.
- Output tax can provide an incentive for businesses to invest in new equipment or technology, as these investments can reduce the amount of output tax they have to pay.
Limitations of Output tax
Output tax has several limitations that businesses need to be aware of.
- Output tax is often charged at a fixed rate, which means that businesses cannot adjust their output tax rate depending on their circumstances.
- Output tax is also not refundable, which means that businesses must pay the entire tax amount, even if they are not making any profit.
- Output tax must be paid regardless of the level of sales, so businesses need to plan ahead to ensure they have enough money to cover the cost of the output tax when it is due.
- Output tax is also not deductible, which means that businesses cannot deduct the cost of the output tax when calculating their profits.
Output tax can be managed in several ways in order to ensure compliance with legal requirements and to maximize revenues. These include:
- Estimating Output Tax: Estimating the output tax due on a sale can be done using a variety of methods, such as using an invoice template or using a tax calculator to work out the rate of tax and the amount of tax due.
- Tracking Output Tax: Tracking the amount of output tax collected from customers is important, as businesses must ensure that they are paying the correct amount of tax to the government. This can be done by keeping records of sales and filing accurate tax returns.
- Payment of Output Tax: Output tax must be paid to the government in a timely manner. Businesses can use online banking or direct debit payments to make sure that their output tax payments are made on time.
In summary, Output tax can be managed in several ways in order to ensure compliance with legal requirements and to maximize revenues. These include estimating, tracking and paying the output tax due.
Footnotes
| Output tax — recommended articles |
| Commercial rate — Grant date — Insured value — Unearned Premium — Depreciation rate — Declared value — Prepaid rent — Debit Note — Common area maintenance |
References
- Bickley J. M., (2003). Value Added Tax: Concepts, Policy Issues, and OECD Experiences,"Nova Publishers".
- Crescenio P. Co Untian, Jr, (2010). Tax accounting Digest,"Rex Bookstore, Inc.".
- Schenk A., Oldman O., (2011). Value Added Tax: A Comparative Approach,"Cambridge University Press".
- Weil S. H., Noi S.A., (2001). Introductory Accounting Skills: For Financial and Management Accounting Students,"Juta and Company Ltd".
Author: Paulina Czarnota
