An advance refers to an amount received before the actual supply of goods or services. Under GST, the time of supply rules dictate when tax liability arises for such advances. These provisions are outlined in Sections 12 to 14 of the Central Goods and Services Tax (CGST) Act, 2017.

In this guide, we explain how advances are treated under GST and when they become taxable.

GST on Advance Received

In many businesses, it is common to receive advance payments for goods or services that will be delivered later. Under GST, such advances may be taxable based on the nature of the supply and the time of supply rules.

Advances for Goods

As per CGST Notification No. 66/2017, effective from November 15, 2017, advances received for the supply of goods are not subject to GST. Instead, GST is applied when the actual supply takes place.

The time of supply for goods is determined by the earliest of:

1. The date of invoice issuance or the last date when the invoice is required to be issued.
2. The date of payment received.

Example:

Ms. Y enters into a contract with XYZ Ltd. for purchasing goods. She pays ₹15,000 as a 50% advance on May 15, 2023. The goods are delivered on June 1, 2023, and the final invoice is issued on June 25, 2023, for ₹30,000. The balance amount is paid on July 15, 2023.

Here, the time of supply will be June 25, 2023, as it is the earliest date applicable for taxing the full amount of ₹30,000.

Advances for Services

Unlike goods, advances received for services are taxable under GST.

The time of supply for services is determined by the earliest of:

1. Date of invoice issuance (if issued within the prescribed time).
2. Date of service provision (if no invoice is issued within the prescribed time).
3. Date of advance payment receipt.
4. Date when the buyer records the service in their books of accounts.

Since advances are included in the time of supply for services, GST must be paid upon receiving the advance.

Example:

Mr. A enters into a contract with Money One Ltd. for consultancy services and pays a ₹50,000 advance (25%) on September 20, 2023. The service is provided on October 1, 2023, and Money One Ltd. issues the final invoice of ₹2,00,000 on October 20, 2023. The remaining amount is paid on November 1, 2023.

Here, the time of supply for the advance amount of ₹50,000 will be September 20, 2023, as it is the earliest applicable date.

Steps a Taxpayer Must Follow on Receiving an Advance

1. Issue a Receipt Voucher:
   The supplier must issue a receipt voucher mentioning the advance amount, GST rate, and details of the goods or services.
2. Calculate and Pay GST on Advance:
   • The advance received is considered inclusive of GST, meaning the tax needs to be calculated accordingly.
   • If the GST rate for the supply is unknown at the time of receiving the advance, a default rate of 18% applies.
   • If the place of supply is not determined, the advance is treated as interstate supply, and IGST is applicable.

Example Calculation:

Mr. A contracts to provide services worth ₹10,00,000 by February 20. The invoice amount including GST (18%) is ₹11,80,000. He receives an advance of ₹4,00,000 on January 10, and the balance payment of ₹7,80,000 is made on February 20, the same date the invoice is raised.

The GST calculation on the advance will be:

• Advance received: ₹4,00,000
• GST @ 18% on advance: ₹72,000
• Balance GST payable on invoice date: ₹1,08,000

Input Tax Credit (ITC) on Advance Payment

A taxpayer making an advance payment cannot claim Input Tax Credit (ITC) until the goods or services are received.

For example, in the above case, the recipient can claim ITC only after receiving the services in February.

Note: If the same contract was for goods instead of services, the recipient would not be liable to pay GST on the advance but would pay the full tax amount of ₹1,80,000 on the invoice date (February 20).

Reporting Advances in GSTR-1

Businesses must report advances in Table 11A of the GSTR-1 return when invoices have not yet been issued. Instead of detailing each advance, a cumulative total is provided.

Table 11B is used to adjust advances reported in previous tax periods against invoices issued in the current tax period.

Key Points for Reporting Advances:

1. Segregate Interstate and Intrastate advances.
2. Report the gross advance received under Gross Advance Received/Adjusted in Table 11A.
3. Mention the applicable tax—CGST & SGST for intrastate advances, IGST for interstate advances.
4. GST on advances received is added to the total tax liability of the supplier.

By understanding and following these rules, businesses can ensure compliance with GST regulations and avoid penalties related to advance payments. We provide the best GST Registration services. 

FAQs: Treatment of Advance Received under GST

1. What is an advance payment under GST?

An advance payment under GST refers to any amount received before the actual supply of goods or services. This can be a partial or full payment made by the recipient before the completion of the supply.

2. Is GST applicable on advances received for goods?

No, as per Notification No. 66/2017-Central Tax, effective from November 15, 2017, GST is not applicable on advances received for the supply of goods. GST is charged only when the invoice is issued or when the goods are supplied.

3. Is GST applicable on advances received for services?

Yes, GST is applicable on advances received for services. The tax liability arises at the time of receiving the advance, even before the actual service is provided.

4. How is the time of supply determined for advances under GST?

The time of supply for advances is determined based on:

• For Goods: The earliest of the date of invoice issuance or the date of supply.
• For Services: The earliest of the date of invoice issuance, date of service completion, or the date of receipt of advance.

5. How should a business report advances in GSTR-1?

Advances received should be reported in Table 11A of GSTR-1 (if an invoice has not yet been issued). When the invoice is issued, the details should be adjusted in Table 11B of GSTR-1.

6. What is a receipt voucher, and when should it be issued?

A receipt voucher is a document issued by the supplier upon receiving an advance payment. It includes details like the amount received, applicable GST rate, and nature of supply.

7. Can input tax credit (ITC) be claimed on advance payments?

No, ITC cannot be claimed on advances. ITC can be availed only when the supplier issues an invoice and the goods or services are received by the recipient.

8. How is GST calculated on advance payments?

If an advance is received, the GST amount should be calculated as part of the advance amount. If the GST rate is unknown at the time of advance, an 18% rate is applied by default.

9. What happens if the advance is refunded later?

If an advance is refunded before the supply is made and no invoice has been issued, the GST paid on the advance can be adjusted in subsequent returns.

10. How is the place of supply determined for advances?

If the place of supply is not known at the time of receiving the advance, it is treated as an interstate supply, and IGST is charged.

11. Is GST applicable on security deposits or earnest money?

No, security deposits and earnest money are not considered advances under GST if they are refundable. However, if these amounts are adjusted against future supplies, GST will be applicable.

12. Are there any exemptions for small taxpayers regarding advance tax?

Yes, businesses registered under the Composition Scheme do not have to pay GST on advances received. They pay GST only when issuing the invoice.