Understanding GST Implications on Advance Payments

Advance payments denote sums collected prior to the actual provision of goods or services. The 'time of supply' regulations dictate the point at which a taxpayer must remit tax for a specific supply. These provisions are detailed in Sections 12 to 14 of the Central Goods and Services Tax (CGST) Act, 2017. This article clarifies how advance receipts are handled under GST and specifies when these advances become taxable.

Businesses frequently accept advance payments for future delivery of goods and services. Under GST, these advance receipts may be subject to tax, with the taxation dependent on the type of supply and the applicable time of supply regulations.

Advance Payments for Goods Supply

As per CGST Notification No. 66/2017, effective from November 15, 2017, advances received for the supply of goods are not subject to GST. The full tax liability arises only when the actual supply occurs, guided by the specific time of supply provisions.

The general criteria for determining the time of supply for goods is the earlier of these dates:

• The date the invoice is issued, or the final permissible date for its issuance.
• The date payment is received.

For instance, consider Ms. Y who made an advance payment of Rs. 15,000 (50%) to ABC Ltd. on May 15, 2023, for goods. ABC Ltd. delivered the goods on June 1, 2023, and issued a final invoice for Rs. 30,000 on June 25, 2023. Ms. Y settled the remaining balance on July 15, 2023. In this scenario, the time of supply for the total amount of Rs. 30,000 is June 25, 2023, as it is the earlier of the invoice issuance date and payment date for the entire supply.

Advance Payments for Services Supply

In contrast, advances received for the supply of services are subject to GST.

The general criteria for determining the time of supply for services is the earliest of the following:

• The date the invoice is issued (if issued within the prescribed date).
• The date the service is provided (if the invoice is not issued within the prescribed date).
• The date the payment or advance is received.
• The date the buyer formally acknowledges receipt of services in their accounting records.

The third point above signifies that if an advance is received for services before the invoice is issued, the date of receiving the advance becomes the time of supply. Consequently, taxpayers receiving advances for services must pay GST on these funds.

For example, Mr. A paid an advance of Rs. 50,000 (25%) to CashFlow Ltd. on September 20, 2023, for consultancy services. The services were rendered on October 1, 2023, and Mr. A recorded this receipt in his books. CashFlow Ltd. issued a final invoice for Rs. 2,00,000 on October 20, 2023. Mr. A paid the remaining balance on November 1, 2023. The time of supply for the Rs. 50,000 advance is September 20, 2023, as it is the earliest of the relevant dates for that portion of the payment.

Taxpayer Responsibilities Upon Receiving an Advance

When an advance payment is received, a taxpayer must undertake the following actions:

Issue a Receipt Voucher

The supplier is obligated to issue a receipt voucher to the individual making the advance payment. This voucher must detail the advance amount, the applicable tax rate, and a description of the goods or services involved.

Calculate and Pay GST on Advance Received

Subsequently, the supplier needs to calculate GST on the received advance and remit this tax when filing the monthly return. The advance amount should be treated as inclusive of GST (grossed up). If the tax rate cannot be determined at the time of receiving the advance, a standard GST rate of 18% must be applied. Furthermore, if the place of supply is uncertain, the advance is presumed to be an interstate supply, requiring the payment of Integrated Goods and Services Tax (IGST).

Let's illustrate the GST treatment of an advance with an example:

Mr. A agreed to provide services valued at Rs. 10,00,000 by February 20. The total invoice amount, including GST at 18%, is Rs. 11,80,000. He received an advance of Rs. 4,00,000 on January 10 and the remaining Rs. 7,80,000 on February 20, when the invoice was also issued.

Here is how the tax would be calculated:

The gross value of the advance is Rs. 4,00,000. Assuming a GST rate of 18%, the GST component is Rs. 61,017 (calculated as 4,00,000 * 18 / 118).

The net value (taxable value) is Rs. 3,38,983 (4,00,000 - 61,017).

For the balance payment, the total amount is Rs. 7,80,000. The GST component is Rs. 1,18,983.

The total GST payable is Rs. 1,80,000 (61,017 + 1,18,983).

It is crucial to note that the taxpayer making the advance payment is not eligible to claim Input Tax Credit (ITC) on the advance. One of the rules for claiming ITC under GST specifies that the taxpayer must have actually received the goods or services. Therefore, in the example above, the recipient can claim ITC only after the services have been received in February.

Conversely, if the contract involved the supply of goods instead of services, the recipient would not be liable to pay tax on the advance received on January 10. Instead, the full tax amount of Rs. 1,80,000 would be payable on the invoice issuance date, February 20.

Reporting Advances Received in GSTR-1

Any advances collected by a taxpayer for which invoices have not yet been issued must be declared under Table 11A of the GSTR-1 return. A consolidated figure of all received advances should be provided, rather than individual details.

Table 11B, on the other hand, is used by the taxpayer to reconcile advances reported in previous tax periods against invoices issued in the current tax period.

It is important to classify advances as either interstate or intrastate. The total amount of gross advances received or adjusted should be entered. Subsequently, the applicable tax (CGST and SGST for intrastate, or IGST for interstate advances) must be specified. This GST on advances is then added to the supplier's overall tax liability.