Treatment of Advance Received under GST

Advances refer to amounts received by a supplier before goods or services are provided. Under GST, the time of supply rules—governed by Sections 12 to 14 of the CGST Act, 2017—determine when tax becomes payable on a particular supply. This article explains the treatment of advances under GST and clarifies when an advance should be taxed.

GST on Advance Received

In many businesses, it is common practice to receive an advance payment for goods or services to be supplied at a later date. Depending on the nature of the supply and the applicable time of supply rules, such advance receipts (also known as advances under GST) may be taxable.

Advances Received on the Supply of Goods

For goods, advances received are not subject to GST (effective from 15th November 2017, as per CGST Notification No. 66/2017). The entire taxable amount is levied when the actual supply occurs based on the time of supply rules.

General Rule for Time of Supply for Goods: The time of supply is the earlier of the following:

• The date of issuance of the invoice (or the last day by which the invoice should have been issued*).
• The date of receipt of payment.

* Note: If the supply involves the movement of goods, the invoice must be issued at the time of removal. Otherwise, the invoice should be issued when the goods are delivered to the recipient.

Example – Supply of Goods:
Scenario: Ms. Y enters into a contract with ABC Ltd. to supply certain goods. She pays a 50% advance of Rs.15,000 on 15th May 2023. The goods are supplied on 1st June 2023, and ABC Ltd. issues a final invoice of Rs.30,000 on 25th June 2023. The balance amount is paid on 15th July 2023.
Time of Supply: The earlier of the invoice issuance or payment date, which is 25th June 2023, is taken for taxing the entire Rs.30,000.

Advances Received on the Supply of Services

For services, advances received are subject to GST. The time of supply is the earliest of the following:

• The date of issuance of the invoice (if issued within the prescribed period).
• The date of provision of the service (if the invoice is not issued within the prescribed period).
• The date of receipt of payment/advance.
• The date on which the buyer records receipt of the service in their books of account.

Note: In the case of services, if an advance is received before the invoice is issued, the time of supply is the date of receipt of the advance. Thus, taxpayers must pay GST on the advance received.

Example – Supply of Services:
Scenario: Mr. A enters into a contract with CashFlow Ltd. to provide consultancy services. He pays a 25% advance of Rs.50,000 on 20th September 2023. The services are provided on 1st October 2023 (which is when Mr. A records receipt of services in his books), and CashFlow Ltd. issues a final invoice for Rs.2,00,000 on 20th October 2023. The balance is paid on 1st November 2023.
Time of Supply: The time of supply is determined by the earliest date among these options, which in this case is the date of receipt of the advance.

What Must a Taxpayer Do When an Advance is Received?

When an advance is received, the taxpayer must:

• Issue a Receipt Voucher: Include details such as the advance amount, applicable tax rate, and a description of the goods or services.
• Calculate GST on the Advance Received: The supplier must compute GST on the advance and pay the tax when filing the monthly return. The advance is treated as inclusive of GST (grossed up).
• If the tax rate is indeterminate at the time of receipt, GST at 18% must be charged.
• If the place of supply is indeterminate, the advance is treated as an interstate supply and IGST applies.

Example – Treatment of Advance for Services:
Scenario: Mr. A enters into a contract to provide services worth Rs.10,00,000 by 20th February. With GST at 18%, the total invoice value becomes Rs.11,80,000. Mr. A receives an advance of Rs.4,00,000 on 10th January, and the balance of Rs.7,80,000 is paid on 20th February. The final invoice is raised on 20th February.
GST on the advance of Rs.4,00,000 is charged when the advance is received. Note that the taxpayer paying the advance cannot claim ITC on the advance until the goods/services are received.

Note: If the contract were for goods instead of services, the entire tax liability would be triggered on the date the invoice is issued.

Reporting of Advances Received in the GSTR-1

Any advances received for which invoices have not been issued must be reported under Table 11A of the GSTR-1 return. Key points include:

• Cumulative Reporting: Provide a cumulative figure for all advances received; individual details are not required.
• Adjustment in Table 11B: Adjust advances reported in previous tax periods against the invoices issued in the current period.
• Segregation of Advances: Separate advances into interstate and intrastate categories and report the gross advances received/adjusted along with the applicable tax (CGST + SGST for intrastate; IGST for interstate).

Conclusion

In the GST regime, the tax collection event occurs at the earliest of the defined dates, ensuring that tax is collected as early as possible. Given the multiple parameters involved in determining the time of supply, businesses often face challenges reconciling their financial records with GST returns. For further assistance or any queries regarding GST compliance on advances, please feel free to contact DisyTax. We’re here to help you navigate GST complexities with clarity and confidence.