Introduction
In the Value Added Tax (VAT) system, taxation is structured around the concepts of output tax and input tax. These two components form the core of the credit mechanism that makes VAT an efficient, transparent, and value-based system of indirect taxation. By calculating the difference between output tax and input tax, businesses determine their net tax liability and ensure tax is levied only on the value added at each stage of the supply chain.

Definition of Output Tax
Output tax refers to the VAT collected by a registered dealer on the sale of goods to customers. It is the tax that is charged on outward taxable supplies—whether made to retailers, wholesalers, or final consumers. Output tax becomes payable to the state government and is calculated as a percentage of the sale price as per applicable VAT rates.

Example:
If a dealer sells goods worth ₹1,00,000 and the applicable VAT rate is 12.5%, the output tax is ₹12,500.

Definition of Input Tax
Input tax is the VAT paid by a registered dealer on purchases of goods or inputs used for business purposes. This includes tax paid on raw materials, capital goods, trading goods, and other business-related purchases made within the same state. Input tax is creditable and can be used to offset the output tax liability.

Example:
If the dealer purchased raw materials worth ₹50,000 and paid 12.5% VAT, the input tax is ₹6,250.

Net VAT Liability Calculation
The VAT payable to the government is calculated by subtracting the input tax from the output tax:

Net VAT Payable = Output Tax – Input Tax

Using the above examples:
Output tax = ₹12,500
Input tax = ₹6,250
Net VAT payable = ₹6,250

Conditions for Claiming Input Tax

• Dealer must be registered under VAT
  
• Goods must be used for taxable business activities
  
• Valid tax invoices must be available
  
• Input tax must be from intra-state purchases only
  
• Input credit is not allowed on exempt or personal-use goods
  

Role in Avoiding Tax Cascading
The input-output tax credit mechanism prevents double taxation by ensuring tax is paid only on the value addition, not on the total transaction value. This system enhances pricing transparency and lowers the tax burden passed on to the consumer.

Conclusion
Output tax and input tax are two fundamental components of the VAT framework. Output tax represents the VAT collected on sales, while input tax represents the VAT paid on purchases. By allowing input tax to be set off against output tax, the VAT system ensures efficiency, fairness, and compliance, making it one of the most progressive indirect tax models prior to the introduction of GST.

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