Treatment of Advance Received in GST
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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.
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.
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.
Here are your tax calculations:
| 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.
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.
