GST Chronicles: Advance Payments in Business

In the world of business, it is common for companies to receive advance payments from customers for goods or services that will be provided at a later date. However, when it comes to tax implications, particularly under the Goods and Services Tax (GST) regime, the treatment of such advance payments can be a bit complex. In this article, we will look at the applicability of GST on advance payments and provide a comprehensive guide to navigate this aspect of taxation.

What is an advance payment?

Advance Payment is receipt of money in advance before completing supply process, such as paying for the goods or services before the receipt of the goods or supply of services. This may sometimes be required by the sellers as safety against non-payment or to cover costs for supplying or providing goods or services

When does the liability for payment of GST arise?

As per sections 12 to 14 of the GST Act, 2017, the liability to pay tax on supply (goods or services) arises based on the “Time of Supply”. Time of supply plays a crucial role in determining the tax liability on advance payments. For goods, the time of supply is determined based on the issuance of an invoice or the receipt of payment, whichever is earlier. However, for services, the time of supply is determined based on specific criteria outlined in the law, such as the completion of the service or the issuance of an invoice.

Accordingly, GST needs to be paid with reference to the time at which advance is received, if any, and this requires compliance with a few procedures, documentation and reconciliation of taxes paid on the advances and supply made.

Time of Supply
Goods	Services
Earliest of: Date of issue of invoice Last date on which invoice should have been issued Date of receipt of advance/ payment.	Earliest of: Date of issue of invoice Date of receipt of advance/ payment. Date of provision of services (if invoice is not issued within prescribed period)

How and why is GST charged on advance payments?

Let’s take an example to understand this provision better:

XYZ received Rs 50,000 in advance from her client ABC Pvt. Ltd. on 25th Feb 2023. The project lasted 9 months, post XYZ raised an invoice for Rs 1,25,000 on 30th Nov 2023.

In this case, the Time of Supply will be as follows:

TOS for Advance Payment – Rs 50,000 is on 25th Feb 2023
TOS for the Remaining Payment – Rs 75,000 is on 30th Nov 2023

GST payment dates will be as follows:

On Rs 50,000 – 20th March 2023 (GST to be collected on Rs. 50,000/- and reported in Point 11A of GSTR-1 of March 2023 to the extent of Rs. 50,000/-. The liability to that extent has to be paid in the February return period)

On the Remaining Rs 75,000 – 20th Dec 2023 (GST to be collected on balance of Rs. 75,000/-. However, the entire invoice value will have to be reported in the GSTR-1 of November month and the GST already paid on advance has to be reversed from November month liability through Point 11B of GSTR-1)

Entire ITC will be available to recipient of services only when the invoice is issued.

Compliance related to receipt of advances

As soon as you receive an advance payment from a client, follow the below-mentioned steps:

Issue a receipt voucher as per section 31 of CGST Act, 2017: The receipt voucher will contain details such as Name, address, and GSTIN of the service provider, Voucher serial number, Date, Description of services for which advance is received, GST Rate & amount and signature of authorized person.
Calculate tax on the advance amount – The amount needs to be grossed up in case the GST has not been collected separately. Suppose, you have received Rs 60,000 in advance, and the GST rate is 18%. Here, 60,000 will be considered inclusive of tax. GST amount will be: 60,000*(18/118) = Rs 9,152 Value of services = Rs 50,848/-

Practical Scenarios in relation to advance receipts and GST Implications on the same

Scenario 1 – The advance has to be returned as the supply did not take place In this scenario, the supply has not taken place due to various reasons and the advance which was collected earlier with GST has to be returned back to the supplier. A refund voucher has to be issued to the supplier while returning back the advance to the client and the same has to be shown as amendment to original advance reported, in point II of Table 11 of Form GSTR-1 to reduce the output GST liability to the extent of advance returned.

Scenario 2 – Supply did not take place, and advance was not returned back In this scenario, the supply has not fully taken place but some work has been done and the advance which was collected earlier with GST WAS NOT RETURNED BACK to the client. In this case, it is best to raise the invoice to the extent of advance collected and reported in the Form GSTR-1.

Scenario 3 -Advance received but in dispute due to issues between the parties In such a scenario, one has to wait to see the outcome of the dispute which will either fall under Scenario 1 or 2 above and act accordingly.

Scenario 4 -Deposits are not taxable like advances A deposit can be described as an amount given to the supplier with an obligation entrusted upon the supplier to keep it safe. However, as and when this deposit is applied as consideration under the contract against the supply made or agreed to be made, it becomes an advance receipt. Retention money is a classic example of a deposit. the recipient may withhold a certain part of the consideration payable to a supplier and keep a part of that amount as a deposit with himself. Only when the supplier discharges the given obligations per the contract terms is retention money released. This retention money is not included in the value if returned as such to the supplier. However, if the supplier fails to fulfil the given obligations per the contract, the recipient may charge the said retention money and apply it against the default. When used, the said retention money becomes chargeable to tax.

Conclusion

Understanding the implications of GST on advance payments is essential for businesses to ensure compliance with the GST law. It is crucial to carefully consider the time of supply and adjust the GST liability accordingly. Both suppliers and recipients should be aware of their respective responsibilities when it comes to advance payments under GST.

Disclaimer

The above is a very brief writeup and solely for educational and informational purposes only. It does not constitute an advice or a legal opinion or any personal views. There may be possibility of a different view on the various subject matter discussed.