How to Calculate Your Tax Liability Under GST (Without Second-Guessing Every Number)

I opened my email last Tuesday to find a client’s panicked message: “My GSTR-3B shows ₹47,000 due, but I only collected ₹52,000 in GST. Where did I go wrong?”

She hadn’t gone wrong. She’d just confused tax collected with tax liability—a mix-up that trips up even seasoned business owners during their third year of GST compliance.

Here’s what you’ll walk away knowing: The exact formula for GST tax liability, how Input Tax Credit changes what you actually pay, and the reconciliation mistakes that trigger notices (even when your math is perfect).

What You Need Before You Start Calculating

Don’t open the GST portal yet.

First, verify you have:

• Your outward supply data for the period (sales invoices with GSTIN, tax rate, and invoice value)
• Purchase invoices showing Input Tax Credit eligibility (inward supplies with valid tax invoices)
• Access to GSTR-1 filed for the same period (because your liability calculation in GSTR-3B must match what you’ve already declared)
• Details of any reverse charge purchases (like services from unregistered vendors or imports)

The Verification Check: Log into the GST portal and navigate to Returns Dashboard.

If GSTR-1 for the period shows “Filed,” you’re ready. If it says “Not Filed” or “Draft,” stop—your liability calculation will be incomplete and you’ll face a mismatch penalty later.

In 2026, most accounting software auto-syncs invoice data, but I still see businesses manually entering figures from Excel.

That’s fine, just make sure your invoice numbering is sequential and matches what’s uploaded in GSTR-1.

The portal’s auto-populated fields pull from your filed returns, and any discrepancy between GSTR-1 and GSTR-3B triggers a system alert that delays ITC claims by 30-45 days.

What Tax Liability Actually Means (The Real Definition)

Tax liability is the total amount of tax you owe to the government for a specific period—before adjusting for credits or TDS.

Under GST, it’s calculated as:

Tax Liability = Output Tax − Input Tax Credit

Output tax is the GST you charge customers on sales.

Input Tax Credit (ITC) is the GST you paid on business purchases that you’re allowed to claim back.

The difference is what you actually pay through the cash or credit ledger on the GST portal.

But here’s where it gets sticky: tax liability isn’t the same as tax payable.

If you have ₹50,000 in output tax and ₹30,000 in eligible ITC, your liability is ₹20,000.

But if you also have ₹5,000 in TDS credits (from clients who deducted tax at source), your net payable becomes ₹15,000.

Most businesses use these terms interchangeably, which creates confusion when reading GSTR-3B.

The GST law defines this under Section 49, but practically speaking: liability = the math; payable = what hits your bank account.

The Components of GST Tax Liability (What Goes Into the Formula)

1. Output Tax (GST You Collected)

This comes from your taxable outward supplies—every GST invoice you issued during the month or quarter.

Let’s say you run a packaging supplies business. In March 2026, you sold:

• ₹4,00,000 worth of goods at 18% GST = ₹72,000 output tax
• ₹1,00,000 at 12% GST = ₹12,000 output tax

Total Output Tax = ₹84,000

This figure should exactly match Table 3.1(a) in your GSTR-3B if you’ve reported outward supplies in GSTR-1 correctly.

The portal auto-fills this from your filed GSTR-1, so manual entry errors are rare—but invoice deletions or amendments after filing GSTR-1 cause mismatches.

2. Input Tax Credit (GST You Can Claim Back)

You purchased raw materials, paid for logistics, and hired a designer.

Each vendor charged you GST, which you can claim as ITC—if the invoices meet eligibility criteria.

March purchases:

• ₹2,00,000 in raw materials at 18% GST = ₹36,000 ITC
• ₹50,000 in freight at 5% GST = ₹2,500 ITC

Total Eligible ITC = ₹38,500

The catch: ITC is only eligible if the supplier has filed their GSTR-1 and the invoices appear in your GSTR-2B (the auto-generated ITC statement).

The GST portal’s ITC help page explains the matching logic, but in practice, 15-20% of ITC gets blocked due to supplier non-compliance—something you won’t know until you reconcile 2B with your books.

3. Reverse Charge Liability

If you bought services from an unregistered vendor (like a freelance consultant without GSTIN) or imported services, you’re liable to pay GST under reverse charge mechanism—even though the vendor didn’t charge you.

March reverse charge transactions:

• ₹30,000 paid to unregistered lawyer = ₹5,400 GST payable by you (18% rate)

This gets added to your output tax liability but also becomes eligible ITC (if used for business), effectively netting to zero in most cases.

The confusion happens when businesses forget to report it in Table 3.1(d) of GSTR-3B, leading to notice for short payment.

Step-by-Step: Calculating Your GST Tax Liability

Phase 1: Determine Total Outward Supply Value

Pull your sales data from March 2026. Include:

• Taxable supplies (goods/services you charged GST on)
• Exempt supplies (no GST charged, but still reported)
• Exports (zero-rated, but invoice value matters for compliance)

Checkpoint: Your accounting software or GST tool should show a “Total Turnover” figure.

For our packaging business example: ₹5,00,000 (taxable) + ₹20,000 (exempt) = ₹5,20,000.

Verification: This must match the sum of all invoice values in GSTR-1 Table 4, 5, 6, and 7. If there’s a ₹1 difference, the portal flags it.

Phase 2: Calculate Output Tax Collected

Multiply each supply category by its GST rate:

Add reverse charge liability: ₹5,400.

Total Output Tax = ₹89,400

Visual Anchor: In GSTR-3B, this appears in Table 3.1 as “Outward taxable supplies (other than zero-rated, nil-rated, and exempted).”

The portal shows a green tick if it matches your GSTR-1 data.

Phase 3: Claim Eligible Input Tax Credit

From your purchase register:

Total ITC = ₹38,500

But here’s the friction point: Your GSTR-2B (auto-generated from supplier filings) shows only ₹35,000 in eligible ITC because one raw material vendor hasn’t filed their GSTR-1 yet.

You can only claim ₹35,000 this month; the remaining ₹3,500 gets carried forward to next month if the vendor files within the allowed window.

The Nuance: Section 16(2)(aa) allows ITC only if it reflects in GSTR-2B.

Manually claiming the full ₹38,500 in GSTR-3B will trigger a notice—even though you paid the tax.

I’ve seen this delay ITC claims by 60+ days for businesses with 20+ vendors.

Phase 4: Calculate Net GST Liability

Formula:

Net Tax Liability = Output Tax − Eligible ITC

= ₹89,400 − ₹35,000

= ₹54,400

But we also claimed reverse charge ITC (₹5,400), so:

Final Liability = ₹54,400 − ₹5,400 = ₹49,000

Phase 5: Adjust for TDS/TCS Credits

If a large client deducted TDS under Section 51 (₹3,000), it appears in your Electronic Credit Ledger on the portal.

Net Payable = ₹49,000 − ₹3,000 = ₹46,000

Payment Mechanism: You can pay via:

• Electronic Credit Ledger (using ITC balance)
• Electronic Cash Ledger (net banking, debit card, or NEFT/RTGS)

The portal auto-debits credit ledger first, then prompts for cash payment.

For our example, if you have ₹10,000 in credit ledger from last month’s excess ITC, you’d pay ₹36,000 in cash.

Visual Anchor: Post-payment, GSTR-3B shows “Payment of Tax” in Table 6.1 with a green “Paid” status.

The challan (PMT-06) gets auto-generated with a CIN (Challan Identification Number).

A Real-World Example (With Actual Numbers)

Scenario: You’re a Bangalore-based SaaS reseller (GST rate: 18%). March 2026 operations:

Sales:

• B2B software licenses: ₹8,00,000 + ₹1,44,000 GST = ₹9,44,000
• Exports (zero-rated): ₹2,00,000 (no GST charged)

Purchases:

• Cloud hosting from AWS (import of service, reverse charge): ₹1,00,000 + ₹18,000 GST (you pay)
• Office supplies from registered vendor: ₹20,000 + ₹3,600 GST

Calculation:

Assume no TDS. You’d pay ₹1,40,400 through GSTR-3B by the 20th of April 2026 (monthly filers) or 22nd/24th (quarterly filers, depending on state).

The reconciliation trap here: If AWS invoice doesn’t show in your GSTR-2A (because foreign vendors don’t file Indian returns), you need to self-declare it in Table 3.1(d) of GSTR-3B and Table 4(A)(5) in GSTR-1.

Missing either creates a ₹18,000 short-payment notice.

Common Mistakes That Trigger GST Notices

1. Claiming Ineligible ITC

The Error: Including GST paid on employee health insurance (₹5,000) or life insurance premiums as ITC.

Why It Fails: Section 17(5) explicitly blocks ITC on insurance, motor vehicles (except specified cases), and food/beverages.

The portal doesn’t auto-reject these during filing, but the backend compliance algorithm flags it during annual reconciliation.

The Fix: Maintain a “Blocked ITC” register. When entering purchases in your accounting software, tag ineligible items upfront so they don’t flow into GSTR-3B.

2. GSTR-1 vs. GSTR-3B Mismatch

The Error: Filing GSTR-1 with ₹10,00,000 in sales but GSTR-3B shows ₹9,50,000 (because you forgot to include one invoice).

Why It Fails: The GST portal’s auto-comparison tool (implemented 2024, refined in 2026) cross-checks Table 3.1 in GSTR-3B against GSTR-1 totals.

A ₹50,000 gap triggers a notice within 15 days.

The Fix: Before filing GSTR-3B, download GSTR-1 summary and manually reconcile invoice totals.

I use a simple Excel formula: =SUMIF(GSTR1_data, "Taxable Value") and compare it to the accounting software’s sales report.

3. Ignoring Reverse Charge Mechanism

The Error: Paying a ₹50,000 legal fee to an unregistered advocate and not reporting the ₹9,000 GST liability.

Why It Fails: Section 9(4) mandates recipient to pay tax under reverse charge.

The system expects this in Table 3.1(d). Not reporting it = ₹9,000 short payment + 18% interest + potential penalty under Section 73.

The Fix: Flag all unregistered vendor payments during invoice entry. Most GST software has a “Reverse Charge” checkbox—use it.

The tax becomes both a liability and ITC, so net impact is zero, but compliance is maintained.

4. Confusing “Tax Payable” with “Tax Paid”

The Error: GSTR-3B shows ₹60,000 liability, but you only paid ₹55,000 in the cash ledger, assuming the ₹5,000 difference will auto-adjust.

Why It Fails: The portal doesn’t auto-adjust. Unpaid liability carries forward with 18% annual interest (1.5% per month).

After 3 months, it becomes a demand notice.

The Fix: After filing GSTR-3B, check the “Tax Liability vs. Cash Ledger” summary on the dashboard.

The difference should be zero. If not, immediately generate a challan (PMT-06) and pay the shortfall.

5. Missing the Due Date

The Error: Filing GSTR-3B on the 22nd when the deadline was the 20th (monthly filers).

Why It Fails: Late fee of ₹50/day (₹20/day for nil returns) up to ₹5,000, plus interest on unpaid tax.

For a ₹1,00,000 liability paid 10 days late, you’d owe ₹1,500 interest + ₹500 late fee.

The Fix: Set calendar reminders for the 18th of every month (or 20th for quarterly filers).

The portal’s SMS/email alerts are unreliable—I’ve had clients miss deadlines because the reminder went to spam.

Reconciliation: The Step No One Talks About (But Everyone Should)

 

 

Calculating liability takes 15 minutes. Reconciling GSTR-2B with your books takes 2 hours—and that’s where cash flow planning happens.

The Process:

1. Download GSTR-2B from the portal (available from the 14th of the following month).
2. Export your purchase register from accounting software.
3. Match invoice-by-invoice: GSTIN, invoice number, invoice date, taxable value, and tax amount.
4. Identify mismatches:

• Missing in 2B: Vendor hasn’t filed GSTR-1 → ITC blocked this month
• Value difference: Vendor uploaded wrong amount → Raise query via GSTR-1A amendment
• Duplicate entries: Same invoice in 2B twice → Claim ITC only once

The 2026 Reality: The portal’s auto-matching improved significantly, but I still find 10-15% of invoices require manual intervention.

The “Suggest Matches” feature (rolled out Q1 2026) helps, but it’s not foolproof—especially for amended invoices.

Cash Flow Impact: If ₹50,000 in ITC is blocked because vendors haven’t filed, you’re paying ₹50,000 more in cash this month.

For businesses operating on 30-day payment cycles, that’s a working capital hit.

I advise clients to maintain a 20% ITC buffer—assume only 80% of expected ITC will be available on time.

Final Checklist Before You File

• [ ] GSTR-1 filed for the period (output tax declared)
• [ ] GSTR-2B downloaded and reconciled (ITC verified)
• [ ] Reverse charge transactions identified and reported
• [ ] Ineligible ITC excluded (blocked under Section 17(5))
• [ ] Tax liability matches across GSTR-1 and GSTR-3B
• [ ] Payment made via cash/credit ledger (CIN generated)
• [ ] Late fee/interest calculated if filing after due date
• [ ] Copy of filed GSTR-3B and ARN saved for records

Once you understand how tax liability is calculated, GST stops feeling unpredictable. It becomes a simple monthly process of tracking sales, adjusting eligible input tax credit, and paying the balance on time. The real challenge isn’t the formula—it’s keeping your invoices, ITC, and returns aligned throughout the month.

That’s where tools like ProfitBooks make a real difference. By keeping your invoicing, GST data, and returns connected in one place, ProfitBooks helps you see your tax liability clearly before due dates—so you stay compliant without last-minute stress or manual calculations.