Treatment of Advance Received in GST
Time of supply regulations under GST is critical for businesses to determine when the tax on the transaction is due to be paid to the government.
For services, the time of supply is usually the earliest of the following dates:
- The date on which the invoice is issued; OR
- The date when the payment and/or advance is received; OR
- In case the issuing of an invoice is delayed for any reason, then the last date on which the invoice must have been issued.
As mentioned in point 2 above, If an advance is received for services, then the time of supply will be considered to be the date on which the advance is received, NOT the date on which the invoice for the advance received is issued. However, this is not applicable to the supply of goods, only supply of services. For the supply of goods, the entire tax amount (including tax on the advance received) is charged only at the time the invoice is issued.
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What must a taxpayer do when receiving an advance?
After receiving an advance, a taxpayer is required to complete the following procedures.
Should issue a Receipt Voucher
The vendor must provide the early payer with a receipt voucher. Information such as the advance amount, the appropriate tax rate, a description of the products or services, etc., will all be included on the receipt voucher.
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Calculate Tax Amount Due on the Advance Received
You must compute tax in advance and pay tax when completing your monthly return. The received advance should be increased. This indicates that the received advance is inclusive of GST. When the tax rate cannot be established during advance receipt, 18% GST must be charged. Additionally, if the place of sale cannot be determined, the advance is deemed an interstate supply and IGST must be paid.
Let’s examine the handling of advances under the GST using an example.
Mr A signed a contract to provide services worth ₹15,00,000 by February 21. The invoice amount, including 18% GST, is ₹17,70,000. He got an advance of ₹6,000,000 on January 11 and the remaining amount of ₹11,70,000 on February 21. The invoice was likewise generated on February 21.
| Date | Total Amount | Basic Amount | GST Amount | Tax to be paid in the month of |
|---|---|---|---|---|
| 11-Jan | ₹600,000 | ₹508,475 | ₹91,525 | January (Advance) |
| 21-Feb | ₹1,170,000 | ₹991,525 | ₹178,475 | February (Balance Payment) |
| Total | ₹1,770,000 | ₹1,500,000 | ₹270,000 |
It is crucial to remember that the taxpayer who pays the advance cannot claim ITC on the advance amount. Taxpayers are only eligible for an ITC for advances made in exchange for future services if such services have been received. In the scenario mentioned earlier, the receiver can submit an ITC claim for a February advance.
Note:Let’s suppose the agreement, as mentioned earlier, was signed to provide the commodities instead of the services. In such a case, the January 10 receiver has no tax liability related to the advance. But he needs to pay the whole ₹1,80,000 tax on the day the invoice is issued, February 20.
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Incorporate advance received in GSTR 1
Part 11A of GSTR 1 must reflect any advances received by a taxpayer for which an invoice was not produced. You need to submit a total for all advances, not the specifics.
Separating the progress into Interstate and intrastate amounts is the first step. Gross Advance Received/Adjusted should reflect the total cash advances granted. Following this, the tax due should be specified: CGST and SGST for intrastate advances and IGST for interstate advances. The supplier’s tax bill now includes this GST on advance.
GST on Advance Received
Under the GST framework, an advance received by a supplier for a future supply of goods or services is subject to tax. The supplier is required to pay GST on such advances at the applicable rate. The tax liability arises at the time of receipt of the advance, even before the supply is made. Proper documentation, including issuing a receipt voucher, is essential to comply with GST regulations. However, advances for exempt or zero-rated supplies are not taxable.
Advances Received on the Supply of Goods
When a supplier receives an advance payment for the supply of goods, GST is calculated and paid on the advance amount at the applicable rate. The supplier must issue a receipt voucher for the advance and adjust the tax amount against the final invoice when the goods are delivered. If the supply is cancelled later, the supplier must issue a refund voucher and reverse the GST liability.
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Advances Received on the Supply of Services
For services, the GST on advances works similarly to goods. The tax is payable upon receipt of the advance, and a receipt voucher must be issued. When the service is provided, the advance is adjusted against the total invoice value. Any cancellations require a refund voucher to reverse the tax liability.
Frequently Asked Questions
- What is considered an advance under GST?Under GST, an advance is any payment received by a supplier for a future supply of goods or services before the service’s actual delivery or completion.
- How is GST calculated on advances?GST is calculated on the advance amount received at the rate applicable to the supply. It is payable when receiving the advance, not the supply.
- What are the compliance requirements for GST on advances?Suppliers must issue a receipt voucher for the advance, pay GST, and adjust the tax when issuing the final invoice. Proper records must be maintained.
- How should advances be treated if the supply is later canceled?In case of cancellation, the supplier should issue a refund voucher and reverse the GST paid on the advance through a credit note.
- What records must be maintained for advances under GST?Suppliers must maintain records of all advances received, receipt vouchers issued, GST paid, and refund vouchers in case of cancellations.
