GST on Advance Received: A Complete Overview
Advances are sums of money received before the delivery of goods or services. The time of supply rules determines when taxpayers must pay taxes on a specific supply. Sections 12 through 14 of the Central Goods and Services Tax (CGST) Act of 2017 regulate the time of supply provisions. This article explains when an advance is subject to GST taxation and decodes how advances get treated under the law.
Table of Contents
Understanding Advance Payments for GST
GST must be paid on an advance payment made by a customer to a supplier to consider supply when the customer purchases goods and services. The customer sends this advance money before the transaction happens. In other words, the tax authorities view the advance amount as taxable before the goods or services get delivered.
Taxable Event and GST Applicability
The following table summarises the applicability of GST under various conditions:
Condition | Applicability of GST |
Advance received for the supply of goods | Not Applicable (Exempted under Notification no. 66/2017) |
Advance received for the supply of services | Applicable |
Supplier opted for composition scheme | Not Applicable |
Supplier not opted for composition scheme (for goods) | Not Applicable (Exempted under Notification no. 66/2017) |
Supplier not opted for composition scheme (for services) | Applicable |
Advance received and supply is cancelled | Applicable (may require adjustments according to specific scenarios) |
Advance refunded | Adjustment/Refund of GST may be applicable |
Advance forfeited | GST may be retained as per specific terms |
The time of supply is the GST-taxable event. Since there isn't an actual supply, one might question why GST gets applied in advance payments. The reason is that the advance payment is deemed a consideration for supply under the GST law. In other words, for tax purposes, the government considers the advance payment made as though the supply had already occurred. The following provides a thorough explanation of how GST applies to upfront payments for future supplies:
Determination of Time of Supply: Sections 12 to 14 of the CGST Act 2017 regulate timescale a taxpayer must discharge GST on a specific supply. The moment the supplier gets paid for the supply is how the "time of supply" is established. It encompasses additional elements such as the receipt of goods or the issuance of an invoice. The earliest date of invoice issuance or payment receipt is typically the time of supply.
Advance Payments: When an advance gets received for a supply, the supply time is at the time of the advance. This holds true whether or not the supply is actually made. The GST must be paid according to the date of the advance's receipt. This necessitates following specific protocols, keeping accurate records, and reconciling taxes paid on advances and supplies.
Assumed Supply: According to Section 12 of the CGST Act of 2017, a "supply" is deemed to have been made to the extent that it is covered by the invoice or, if applicable, the payment.
For example, if an advance of Rs. 10 lakh is received for a future supply of Rs. 1 crore, the time of supply for the advance received (Rs. 10 lakh) is at the time of advance receipt.
Exemption for Goods Suppliers: On November 15, 2017, the Government issued Notification No. 66/2017, understanding the challenges small business owners face in complying with the GST on advances. This notification releases all goods suppliers who have not chosen to participate in the composition scheme from having to pay GST on advances. The time of supply only becomes relevant for these taxpayers when the invoice is issued, and they must pay their GST liability appropriately.
Service Provider: Nevertheless, service providers must pay GST when they receive advances.
Advances Received on the Supply of Goods
Advances received for the supply of goods are exempt from GST. (as per CGST Notification No.66/2017, effective November 15, 2017). According to the time of supply regulations, the full amount will be taxed when the supply occurs.
The earliest of the following is the general rule for the time of supply of goods:
The invoice's issue date or the deadline for issuing it
The payment date
For instance, on May 15, 2023, Mr. A paid a 50% advance of Rs. 15,000 to X Ltd. for the supply of specific goods under the contract. Mr. A received the goods from X Ltd. on June 1st, 2023. X Ltd. sent out a final invoice for Rs. 30,000 on June 25, 2023, for the supply of goods. Mr. A paid the remaining balance on the invoice on July 15, 2023. Therefore, the earlier of the two dates—June 25, 2023—for taxing the Rs. 30,000 will be the time of supply.
Advances Received on the Supply of Services
GST gets applied to advances paid for services rendered. The earliest of the following gets accepted as the time of supply of services:
Date of invoice issue (if the invoice gets issued on the designated date)
Date of service delivery (if the invoice is not sent by the deadline)
Date of payment or advance receipt
The date that the buyer records in their books that they received the services
The receipt of the advance is the subject of the third bullet point above. This implies that in the event of service delivery, the date of supply would be the date the advance was received if it was received before the invoice was issued. Taxpayers are required to pay GST on advances they receive in exchange for services rendered.
For instance, Mr. A signed a contract with MNO Ltd. He made a Rs. 50,000 25% advance payment on September 20, 2023. When Mr. A entered the services' receipt in his books of accounts on October 1, 2023, the services were provided. On October 20, 2023, MNO Ltd. issued a final invoice for the supply of goods totalling Rs. 2,00,000. Mr. A paid the remaining invoice balance on November 1, 2023. The earlier of the four dates, which is June 25, 2023, for the receipt of the advance, or Rs. 50,000, will therefore be the time of supply.
Exceptions and Specific Rules for Advance Payments
Although advance payments are subject to GST, there are some exceptions and particular guidelines that one should be aware of:
Zero GST Rate: The procedure of matching and offsetting receipts against invoices might not be relevant if the advance payment transaction is subject to a 0 (zero) GST rate. It implies that you won't be required to pay GST in advance if the goods or services are subject to zero-rate taxation.
Interstate and Intrastate Transactions: You must compute distinct GST components based on whether the transaction is intrastate or interstate. You compute the Central GST (CGST) and State GST (SGST) for intrastate transactions and the Integrated GST (IGST) for interstate transactions.
Treatment of Advance Received by a Taxpayer
After receiving the advance, a taxpayer must do the following:
Provide a Voucher for Receipt
The person making the advance payment must receive a receipt voucher from the supplier. The receipt voucher includes details such as the advance amount, the applicable tax rate, the description of the goods or services, etc.
Determine GST based on the advance received
After that, the supplier must compute GST on the advance and pay it when submitting the monthly return. It's time to gross up the advance you received. It indicates that the advance received is GST-inclusive. GST @ 18% must be applied when the tax rate is unclear when the advance is received. Additionally, if the place of supply cannot be determined, the advance is an interstate supply, and IGST must paid. It is crucial to remember that the taxpayer making the advance payment is not qualified to receive the input tax credit (ITC). The taxpayer must have received the goods or services to claim the ITC under GST. Accordingly, the recipient will be eligible to claim the ITC once the facilities are received in February. Consider the following scenario: The contract was signed to supply goods rather than services. The recipient is then exempt from paying taxes upon receiving the advance on January 10th. However, on February 20, the day the invoice is issued, he must pay the full Rs 1,80,000 tax.
Reporting of Advances Received in the GSTR-1
A taxpayer should include any advances they have received for which invoices have not been issued in Table 11A of their GSTR-1 return. A total amount of all advances received must be provided; specifics of each advance are not required. In contrast, the payer must reconcile invoices from the current tax period with advances reported in prior tax periods under Table 11B. It is necessary to distinguish between intrastate and interstate advances. The Gross Advance Received/Adjusted section should include the gross advances received. It should be followed by the tax that must paid, which has CGST and SGST for intrastate advances and IGST for interstate advances. This GST gets added to the supplier's overall tax obligation on advances received.
Advance Payment Reconciliation and GST Adjustments
Let's now examine the procedures for handling GST adjustments and advance payment reconciliation for goods and services under the GST regime:
Produce Unapplied Receipts: Utilize a specific application to generate unapplied receipts for upfront payments. These receipts are made without the corresponding invoices because the supply hasn't happened yet.
Determine GST on Advance Payments: Different programs are available to determine GST on advance payments for goods and services. The Service Accounting Code (SAC) tax rates and the Harmonized System of Nomenclature (HSN) are two examples of the variables taken into account by these programs.
Match and Offset Receipts: Use particular programs for goods and services independently to offset advance payments against invoices. This step guarantees that the GST liability is appropriately adjusted.
Conclusion
To sum up, GST is due on payments made in advance. Advance payments are subject to GST since the tax authorities view them as consideration for future supplies. Nonetheless, guidelines, procedures, and exclusions for figuring out, balancing, and modifying GST are available on upfront payments. Businesses must comprehend these to ensure accurate financial transactions and comply with GST regulations.
FAQ
Q1. What is GST liability on advance payments?
When money gets received before the delivery of goods or services, it creates a GST liability on advance payments under the Goods and Services Tax (GST) Act. This advance is considered a taxable event under the GST Act, and depending on the nature of the supply, GST must paid when the advance is received.
Q2. How is an advance payment considered under GST?
An advance payment is a consideration for the supply of goods or services under the GST. In contrast to when the actual supply occurs, the tax liability for the advance is triggered at the time of receipt and is subject to GST.
Q3. Is GST applicable on all types of advance payments?
No, not all forms of advance payments are subject to GST. Advances from unregistered companies advances for goods from suppliers not covered by the composition scheme, and advances received for exempt supplies are examples of exceptions.
Q4. What is a taxable event in context of GST on advance payments?
Payments made before the delivery of goods or services are taxable under GST. According to the GST Act, this advance payment is a tax event since it creates a liability.
Q5. What are the rules applicable to advance payments under GST?
Specific regulations include mandatory GST on advances received for services and exemptions from GST for advance payments received by specific suppliers of goods. The nature of the supply and the delivery time are essential factors in determining whether GST is applicable.
Q6. Are there exceptions to the applicability of GST on advance payments?
Yes, there are particular guidelines and exceptions when paying in advance. According to Notification No. 66/2017, for example, businesses that have not chosen the composition scheme are exempt from GST on advance payments for the supply of goods. The GST Act's specific regulations are the foundation for each exemption related to taxable events and GST applicability.
Q7. How is advance payment reconciliation done for GST?
For GST, advance payment reconciliation entails comparing the received advance payments with the relevant sales or AR invoices. This procedure prevents double taxation on the advance and final supply amounts and guarantees that GST gets accounted for.
Q8. What are GST adjustments in the context of advance payments?
Advance payments are subject to GST adjustments when deducted from the final invoice. Depending on the situation, the GST paid might need to be reimbursed or applied to future supplies if the supply gets canceled.
Q9. How does the GST Act define advance payment for services?
Any payment made before the actual delivery of services is considered an advance payment for services under the GST Act. These payments are regarded as upfront payments for services and are liable to GST at the time of receipt.
Q10. What happens if an advance payment is later adjusted or refunded?
Upon later adjustment or refund of an advance payment, the GST paid on the advance must be adjusted appropriately. According to the GST reconciliation procedure, this can entail adjusting the GST in later tax returns or issuing a credit note.
Q11. What should businesses do to ensure compliance with GST on advance payments?
Companies should carefully evaluate when to supply and modify their GST liability accordingly. To guarantee precise adherence to the GST laws in their jurisdiction, speak with a tax expert or ask the appropriate tax authorities for advice.
Q12. Are there any penalties for non-compliance with GST on advance payments?
According to the terms of the GST law, there may be penalties and fines for breaking the rules, including how advance payments get handled. It is essential to follow the rules and complete the tax obligations to avoid any penalties.
Q13. How is the time of supply determined for services?
Two examples of the precise criteria specified in the GST law are the completion of the service or the issuance of an invoice that determines the time of supply for services. As a result, the advance payment becomes liable for GST.
Q14. Can a supplier adjust the GST paid on advance against the final tax liability?
Yes, the supplier may deduct the GST obligation on the advance payment from the total tax liability after the actual delivery of goods or services. According to the supplier's claim, the GST paid in advance may be deducted from the GST owed on the supply invoice.
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