Advances refer to amounts received before the goods or service have been supplied. The time of supply rules determine when a taxpayer is required to discharge tax on a particular supply. The time of supply provisions are governed by Sections 12 to 14 of the Central Goods and Services Tax (CGST) Act, 2017.
In this article, we decode the treatment of advances under GST as well as explain when an advance is to be taxed under GST.
In business, it is common practice to receive an advance for goods and services to be supplied at a later date. These advance receipts, also known as advances under GST, may be taxable under GST depending on the nature of supply and time of supply rules.
For the supply of goods, advances received are not subjected to GST. (w.e.f. 15th November 2017 vide CGST Notification No.66/2017). The entire amount will be taxed when the supply actually happens, based on the time of supply rules.
The general rule for the time of supply for goods is the earliest of the following-
For example, Ms Y entered into a contract with ABC Ltd. to supply certain goods, for which she paid a 50% advance of Rs.15,000 on 15th May 2023. The goods were supplied to Ms Y from ABC Ltd. on 1st June 2023. ABC Ltd. issued a final invoice for the supply of goods on 25th June 2023, amounting to Rs.30,000. The balance amount of the invoice was paid for by Ms Y on 15th July 2023. Hence, the time of supply in this case will be the earlier of the two dates, i.e. 25th June 2023, for taxing the entire amount of Rs.30,000.
Advances received on the supply of services are subjected to GST.
The general rule for the time of supply for services is the earliest of the following –
The third bullet point above relates to the receipt of advance. This means that, in the case of the supply of services, if the advance is received before the issue of the invoice, then the time of supply would be the date of receipt of the advance. Taxpayers receiving advances for the provision of services must pay GST on the money received.
For example, Mr A entered into a contract with CashFlow Ltd. to supply consultancy services. He paid a 25% advance of Rs.50,000 on 20th September 2023. The services were provided on 1st October 2023, when Mr A recorded receipt of services in his books of accounts. CashFlow Ltd. issued a final invoice for the supply of goods on 20th October 2023, amounting to Rs.2,00,000. The balance amount of the invoice was paid for by Ms Y on 1st November 2023. Hence, the time of supply in this case will be the earlier of the four dates, i.e. 25th June 2023 for the receipt of advance, i.e. Rs.50,000.
A taxpayer has to take the following actions on receipt of the advance:
The supplier must issue a receipt voucher to the person paying in advance. The receipt voucher will contain details like the amount of advance, the applicable tax rate, the description of goods or services, etc.
Calculate GST on Advance Received
Next, the supplier will need to calculate GST on the advance and pay this tax while filing the return for the month. The advance received should be grossed up. This means that the advance received is considered inclusive of GST. When the rate of tax cannot be determined during receipt of the advance, then GST @ 18% has to be charged. Also, if the place of supply cannot be ascertained, then the advance is considered to be an interstate supply, and IGST has to be paid.
Let us understand the treatment of advance under GST using an example:
Mr. A entered into a contract to provide services worth Rs 10,00,000 by 20th February. The total invoice value, along with GST @ 18% is Rs 11,80,000. He received an advance of Rs 4,00,000 on 10th January and a balance payment of Rs 7,80,000 on 20th February. The invoice was also raised on 20th February.
Here is how you will calculate tax:
It is very important to note here that the taxpayer paying advance is not eligible to claim input tax credit (ITC) on advance paid. One of the rules for claiming ITC under GST requires that the taxpayer has received the goods/services. Hence, in reference to the example above, the recipient will be eligible to claim ITC only once the services have been received in February.
Note: Say the above contract was entered to supply the goods instead of providing services. Then, the recipient is not liable to pay the tax on the receipt of the advance on 10th January. However, he has to pay the entire tax amount of Rs 1,80,000 on the date of issue of the invoice, i.e. 20th February.
Any advances received by a taxpayer for which invoices have not been issued should be mentioned under Table 11A of the GSTR-1 return. Details of each advance need not be given; a cumulative figure of all the advances received has to be provided.
Table 11B, on the other hand, requires the taxpayer to adjust advances reported in the previous tax periods against invoices issued in the current tax period.
Note that the advances should be segregated into Interstate and intrastate advances. The gross figure of advances received should be mentioned under Gross Advance Received/ Adjusted. After this, the tax payable, i.e. CGST and SGST in case of intrastate and IGST in case of interstate advances should be stated. This GST on advances received is added to the total tax liability of the supplier.
Advances received can be easily recorded in ClearGST software. Here is how you can do it.
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