GST on Advances Received for Future Supplies

The time of supply basically determines when the taxpayer is required to discharge tax on a particular supply. Time of supply provisions are governed via Section 12 to 14 of the CGST Act, 2017. In accordance with the said provisions, the time of supply is determined with regard to the time when the supplier receives payment with respect to the supply, in addition to some different references such as issue of invoice, receipt of goods etc.

In general, the time of supply is earliest of issuance of invoice or receipt of payment. Therefore, in case of advance received for any supply, the time of supply is constant at the factor when advance is received, regardless of the fact whether the supply is made or not. Accordingly, GST is needed to be paid with reference to the time at which advance is received, if any, and this calls for compliances with a few procedures, documentation and reconciliation of taxes paid on the advances and supply made. Further, according to explanation 1 to Section 12 of the CGST Act, 2017, a “supply” shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment.

For example, an advance of Rs. 10 lakhs is received for a supply worth Rs. 1 crore which to be made in the future. The time of supply to the extent of advance received i.e. Rs.10 lakhs shall be at the time of receipt of advance, while the balance amount of Rs. 90 lakhs shall be determined with reference to the date of issue of invoice and other relevant parameters.

However, there may be times, where it may occur that the supply is cancelled after paying the advance. In such cases, relying on agreements, the advance that is received can be either refunded, forfeited or adjusted in later supplies that shall take place. All this could, therefore, require different tax treatments.

Thus, understanding the fact that small businessmen may be burdened with compliance issues with regard to GST on advances, the Government has come out with Notification No. 66/2017 dated 15th November 2017, whereby all suppliers of goods who have not opted for the GST Composition Scheme, have been exempted from the load of paying GST on advances received. Hence, for such categories of taxpayers, the time of supply would occur only at the time of issue of invoice and the taxpayers need to discharge GST liability accordingly. But, the supplier of services are required to pay GST at the time of receipt of advances.

The products which had been in the highest tax bracket of 28% were brought down to the 5/12/18% bracket after the decision made by the GST Council in its meeting that was help on 10th November 2017. Notification No. 41/2017 – Central Tax (Rate) dated 14th November 2017 has additionally been issued, giving effect to the revised rates. It might also so happen that advances have been given while the rate was 28% and the supplier has paid tax on it. Subsequently, the rate has now been reduced to 18%.

Here, considering that the supply took place after the exchange in tax rate and the invoice for the same had also been issued after the exchange in tax rate, the time of supply, with regard to segment 14 of the CGST Act, is the date of issue of invoice. Therefore, a 10 per cent additional tax paid can either be adjusted towards the balance payment of tax against that particular supply or claimed back as refund.

For the kinds of taxpayers who are required to discharge GST on Advances, the following could be relevant.

Compliances under GST

With regard to Section 31 (3) (d) of the CGST Act, 2017, a registered person shall, on receipt of advance payment with respect to any supply of goods or services or both, issue a receipt voucher or another document, containing such particulars as may be prescribed, evidencing receipt of such payment;

The receipt voucher shall include the details as contained in Rule 50 of the CGST Rules, 2017 which might be as follows:

1. a) name, address and Goods and Services Tax Identification Number (GSTIN) of the supplier;

1. b) a consecutive serial number not exceeding sixteen characters, in a single or a couple of series, containing alphabets or numerals or special characters, hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, specific for a financial year;

1. c) date of its issue;

1. d) name, address and Goods and Services Tax Identification Number (GSTIN) or Unique Identity Number (UIN), if registered, of the recipient;

1. e) description of goods or services;

1. f) amount of advance taken;

1. g) rate of tax (Central tax, State tax, integrated tax, Union territory tax or cess);

1. h) amount of tax charged in regard to taxable goods/items or services (Central tax, State tax, integrated tax, Union territory tax or cess);

1. i) place of supply together with the name of State and its code, in case of a supply in the course of inter-State trade or commerce;

1. j) whether the tax is payable on reverse charge basis; and

1. k) signature or digital signature of the supplier or his/her authorised representative.

What if the rate of tax or place of supply cannot be determined at the time of receiving advance payment?

The proviso to Rule 50 of the Rules ibid provides that wherein at the time of receipt of advance, if the rate of tax isn’t always determinable, the tax will be paid at the rate of 18% and if the nature of supply is not determinable, the same shall be dealt with as inter-State supply and GST must be paid accordingly.

After an advance payment has been made and a receipt voucher has also been issued, there may be conditions in which the supply is subsequently not made and the amount of advance is to be refunded. There may be a couple of conditions. One is that no tax invoice is issued until then. In that case, the advance payment taken may be refunded and refund voucher is to be issued in such cases. However, if tax invoice has already been issued, credit note should be issued with a purpose to square off the transaction. Credit Note can be issued in terms of the provisions contained in Section 34 of the Act ibid read with Rule 54 of the Rules ibid.

According to Section 31 (3) (e) ibid, where, on receipt of advance payment with respect to any supply of goods or services or both, the registered individual issues a receipt voucher, but ultimately no supply is made and no tax invoice is issued in pursuance thereof, the stated registered individual can also issue to the person that had made the payment, a refund voucher against such payment.

The refund voucher shall be as in regard with Rule 51 of the Rules ibid and shall contain the following particulars:

1. a) name, address and Goods and Services Tax Identification Number (GSTIN) of the supplier;

1. b) a consecutive serial number not exceeding sixteen characters, in a single or a couple of series, containing alphabets or numerals or special characters’ hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, unique for a financial year;

1. c) date of its issue;

1. d) name, address and Goods and Services Tax Identification Number (GSTIN) or Unique Identity Number (UIN), if registered, of the recipient;

1. e) number and date of receipt voucher issued according to the provisions of Rule 50;

1. f) description of goods or services in respect of which refund is made; (g) amount of refund made;

1. g) rate of tax (Central tax, State tax, integrated tax, Union Territory tax or cess);

1. h) amount of tax paid in respect of such goods or offerings (Central tax, State tax, integrated tax, Union Territory tax or cess);

1. i) whether the tax is payable on reverse charge basis; and

1. j) signature or digital signature of the supplier or his/her authorised representative.

As in accordance with Rule 56(3) of the Rules ibid, each registered individual shall preserve and maintain a separate account of advances received, paid and adjustments made thereto.

Table 11 of GSTR 1: Consolidated Statement of Advances Received/Advance Adjusted in the Current Tax Period/ Amendments of Information Furnished in Earlier Tax Period: Rate Wise and Intra/Inter-State Wise

Table 11A of FORM GSTR-1 captures data related to advances received, rate-wise, within the tax period and tax to be paid thereon together with the respective place of supply (POS). On the other hand, Table 11B captures adjustment of tax paid on advance received and reported in earlier tax periods towards invoices issued in the current tax period. The details of the information referring to advances would be submitted in Table 11A only if the invoice has not been issued in the same tax period wherein the advance was received. Whereas adjustments made in respect of advances received during the earlier tax period, however invoices issued within the current tax period could be contemplated in Table 11B.

It may be cited that the dates for FORM GSTR-2 and FORM GSTR-3 have not been notified so far.

GST on Advance Received through Composition Dealer

A Composition dealer or supplier is governed with regard to Section 10 of the Act ibid which states as under:

Section 10. (1) Notwithstanding anything to the contrary contained on this Act however subject to the provisions of sub-sections (3) and (4) of segment 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed one crore rupees, may prefer to pay, in lieu of the tax payable by means of him/her, an amount calculated at such rate as may be prescribed,

but now not exceeding:

(a) one per cent of the turnover in State or turnover in Union Territory in case of a manufacturer or trader,

(b) two and a half per cent of the turnover in State or turnover in Union Territory in case of persons engaged in making supplies cited in clause (b) of paragraph 6 of Schedule II, and subject to such conditions and restrictions as may be prescribed.

The provisions of Section 10 are problem to Section 9(3) and (4) which would suggest that the composition dealer can make essential compliances resulting from reverse charge supplies (aside from payment of tax u/s 10 on the prescribed rate on his/her outward supplies). However, provisions of Section 9(4) of the Act ibid had been suspended till 31st December 2018 vide Notification No.38/2017 – Central Tax (Rate) dated 13th October 2017. Section 10 of the Act ibid also indicates that a composition dealer has to pay, in lieu of tax payable by him/her, an amount calculated on the prescribed rate.

The prescribed rate is implemented on the turnover in the state of the composition dealer/supplier. Turnover in a state has been defined in Section 2(112) of the Act ibid as “turnover in State” or “turnover in Union Territory” means the aggregate value of all taxable supplies (excluding the rate of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union Territory with the aid of a taxable person, exports of goods or services or both and inter-State supplies of goods or supplies or both made from the State or Union Territory by the stated taxable person but excludes Central tax, State tax, Union Territory tax.

In Table 6 of the GSTR-4, the return for composition taxpayer, the tax on outward supplies made shall be computed as net of advance and goods returned. Further, in Table 8, consolidated statement of Advances paid/Advance adjusted on account of receipt of supply is therefore, required to be detailed.

A combined reading of the above provisions would indicate that a composition dealer will not be required to pay any tax on advances received, if such advances pertain to his/her outward supplies. The advances received and goods returned do not form a part of taxable supplies and do no longer form part of the turnover in a State at the end of the quarter (tax period) for the purpose of computing turnover in a State.

Things A Taxpayer Must Do Upon Receipt of Advance Payment

A taxpayer has to take the subsequent moves on receipt of advance payment. These are as follows:

(a) Issue a Receipt Voucher

The supplier has to issue a receipt voucher to the individual paying advance. The receipt voucher will contain information of the amount of advance, rate of tax applicable, description of goods or services, etc.

(b) Calculate Tax on Advance Received

The person ought to calculate tax on advance and pay tax when filing return for the month. The advance received ought to be grossed. This means that advance received is considered inclusive of GST. When the rate of tax can’t be determined at some point of receipt of advance, then GST @ 18% needs to be charged. Also, if the point of sale cannot be ascertained the advance is considered as inter-State supply and IGST needs to be paid.

(c) File Advance Received in GSTR-1

Advance received by a taxpayer for which invoice is not issued is required to be filed in Table11A of GSTR-1. Details of each advance is not mandated to be entered, A cumulative figure of all the advances received has to be provided. The gross should be first segregated into Inter-State and intra-State advances. The gross amount of advances received needs to be noted under Gross Advance Received/Adjusted.

After this, the tax that is payable, which is CGST and SGST in case of intra-State and IGST in case of inter-State advances ought to be stated. This tax on advance received is then added to the tax liability of the supplier.