Impact of GST on Advances/Security Deposit Etc.

One of most important decisions taken by Central Government is the implementation of Goods and Services Act, 2017 all over India. Implementation of GST has been done to remove anomalies in previous VAT/Services Tax and other taxes. In previous tax regime, end users were enforced to pay tax on taxes. The Cascading Affect of taxes has been removed through implementation of GST. Now all over India One Tax One Nation concept has been implemented.  

GST Act, 2017 subsumed various Central as well as State Acts related to indirect taxation. GST subsumed VAT, Services Tax Act, Excise Act, Octroi, Entry Tax, Luxury Tax, etc.  

The Central Government through 101^st Constitutional Amendment Act ,2016 introduces GST Act, 2017 all over India.

GST defined- Tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption.

Services defined– means anything other than goods; and

Goods defined– includes all materials, commodities and articles. 

NOW LET’S CONSIDER OUR TOPIC

“CONSIDERATION” as defined under GST Act, 2017

Section 2(13) of the CGST Act, 2017 defines as follows;

Consideration in relation to the supply of goods or services includes: –

(a) Any payment made or to be made , whether in money or otherwise ,in respect of ,in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) The monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given the Central or State Government.

Provided that- Deposit given in respect of supply of Goods or Services or both shall not be considered as payment made for such supply unless supplier applies the deposit as consideration for the said supply.

While going through above definition we find below facts related to consideration;

1. There should be nexus between supply and consideration. Consideration should be related to some identifiable activity;

2. Consideration can be in terms of money or money worth. The payment of consideration in kind also comes in the definition of consideration;

3. Deposits made by a person qualifies as consideration only when the amount of deposit apply towards the supply made.

LET’S CONSIDER CONCEPT OF DEPOSIT AND ADVANCE;

DEPOSIT: means a sum of money paid by contractor to the developer, and which is utilised the developer on the occurrence of a contingent event (such as non-performance of obligation as mentioned in the contract by the contractor). If such event does not occur, then the deposit amount shall be returned to the contractor.

ADVANCE: is a sum of money payable by the service recipient (developer) to the service provider(contractor), at the initiation of contract and said advance is subsequently adjusted against the consideration payable for the supply of services.

The main difference between Advance and Deposit is a Deposit is refundable and adjustable only on occurrence of some specific event or contingent event. Whereas an Advance is not refundable and shall be necessarily adjustable in final payment of sale consideration.

AN ADVANCE WILL ALWAYS QUALIFY AS A CONSIDERATION as it is made always in lieu of supply and where as a Deposit is not.  

TREATMENT OF MOBILIZATION ADVANCE IN GST

A work contractor collects Mobilization Advance from its customer and same will be adjusted against bills raised.

Section 13 of CGST Act, 2017 provides that Work Contractor would be liable to discharge its GST liability at time when it receives the Mobilization Advance or the date on which the invoice for such advance is raised, whichever is earlier.

Note- the recipient would be eligible to the ITC of Mobilization Advance, only when the said advance is adjusted against the bills raised by the Contractor. 

TREATMENT OF MATRIAL ADVANCES;

In cases where an agreement contemplates payment of material advances (an advance amount towards supply of goods is required to be paid) the liveability of GST will be governed by the date of transfer of title of goods.

In cases where although the material advance was paid pre-GST period but physical supplies are made after 1July ,2017 and contractually the title in goods gets transferred on completion of physical supply of goods, the contractor will be required to discharge its GST liability.

Where contractually, there is transfer of title in goods at the time of payment of material advance and the VAT liability thereon was duly discharged by the contractor in the pre-GST period, then contractor will not be required to pay any GST even if goods are supplied after 1^st July, 2017. 

TREATMENT OF RETENTION MONEY;

 Generally, in all construction contracts, customer retains a portion of consideration or invoice amount as “Retention Money” and same shall be paid after completion of project.

Retention Money kept by customer from invoice amount as a security amount for proper completion of construction project. The retention money clause is generally an important part of Construction Contract. Retention Money keep customers in safe position and enforce contractor to complete project within time and keep standard specified intact.

The contractor shall require to discharge his GST liability on whole invoice value, which also includes retention money kept by the customer.

It may be noted that the recipient would not be allowed to take the ITC of the tax( and would need to reverse proportionate credit to the extent of non-payment plus interest) , proportionate to the amount of consideration not paid; the recipient would be eligible to full credit only on payment on the remaining consideration.  

TREATMENT OF SECURITY DEPOSIT

It is an amount paid by customer to the Work Contractor, in various forms like Bank Guarantee, Cash, etc., it may be noted that Security Deposit is a deposit, which is utilised by the supplier only on occurrence of a contingent event. In case such even not occur, then the Security deposit will be refundable to the customer on completion or according to the terms and conditions of contract agreement.

Since “Deposit” does not include in definition of “Consideration” and hence no GST will be levied on it. If on happening of a contingent event if Security deposit is adjusted into consideration then GST will be paid on it. 

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.