1. Concept of “advance receipts”

As we know that there is no definition for the “Advance receipts” have been provided under GST laws. However, as per background study material issued by Institute of Chartered Accountants of India, “Advances refer to payment as part of consideration of an agreement before the supplier performs his obligation under the said agreement. It is not provided with an intent of refunding unlike deposit”. 

As per section 7 read with section 12 and section 13 of CGST Act, 2017, advance receipts for supply of goods or services or both are liable to tax at the time of receipt of such advances even if original supply of goods or services or both is yet to be supply.

Section 12 or Section 13 provides that time of supply of goods or services shall be earlier of “date of the issue of tax invoice” or “the date of receipt of payment”. Thus, it is vital to understand the treatment of ‘advance receipt’.

2. Taxability of advance receipts

Initially as per notification No. 40/2017- Central Tax dated 13th October, 2017 issued by CBIC which states that the registered person shall pay the tax on the outward supply of goods at the time of supply as specified in Section 12(2)(a) i.e. date of issues of Invoice. If he satisfied the following conditions:

  • The registered person whose Aggregate turnover in the preceding financial year did not exceed 1.5 crore rupees or aggregate turnover in the year in which taxpayer has obtained registration is likely to be less than 1.5 crore rupees, and
  • Taxpayer did not opt for the composition levy under section 10 of the said Act.

Hence where above both conditions satisfied by register taxpayer he shall not require to pay tax on advance receipt.

Relevant extract of notification reproduced below for ready reference

The registered person whose aggregate turnover in the preceding financial year did not exceed one crore and fifty lakh rupees or the registered person whose aggregate turnover in the year in which such person has obtained registration is likely to be less than one crore and fifty lakh rupees and who did not opt for the composition levy under section 10 of the said Act as the class of persons who shall pay the central tax on the outward supply of goods at the time of supply as specified in clause (a) of sub-section (2) of section 12 of the said Act including in the situations attracting the provisions of section 14 of the said Act, and shall accordingly furnish the details and returns as mentioned in Chapter IX of the said Act and the rules made thereunder and the period prescribed for the payment of tax by such class of registered persons shall be such as specified in the said Act.

Subsequently Notification No. 66/2017- Central Tax dated 15th November 2017 has been issued which supersede the notification No. 40/2017-Central Tax, dated the 13th October, 2017 as discussed above and has exempt all the registered persons dealing in supply of goods except the registered persons who opt for composition scheme.

Hence as per this notification there is no requirement to pay tax on advance receipt for INTRA-STATE only for supply of goods by normal registered persons (i.e. registered persons other than Composition Dealers) because there is no similar notification have been issued under IGST Act. However, as per section 20 of IGST Act 2017, this notification may get automatically applicable for Inter-state transactions also.

Certain important point regarding the Notification No. 66/2017- Central Tax dated 15th November 2017.

  • This is exclusively for supply of goods only.
  • It is not applicable for supply of Hence, any amount received as advance for supply of services would be liable for tax on receipt basis.
  • It is also not applicable for Composition dealers. Therefore, any amount received by such dealers “as advance” is liable for tax on receipt basis.
  • Above mentioned notification is applicable only for those advances which have been received on or after 15th November 2017.

Relevant extract of notification reproduced below for ready reference

 “The Central Government, on the recommendations of the Council, hereby notifies the registered person who did not opt for the composition levy under section 10 of the said Act as the class of persons who shall pay the central tax on the outward supply of goods at the time of supply as specified in clause (a) of sub-section (2) of section 12 of the said Act including in the situations attracting the provisions of section 14 of the said Act, and shall accordingly furnish the details and returns as mentioned in Chapter IX of the said Act and the rules made thereunder and the period prescribed for the payment of tax by such class of registered persons shall be such as specified in the said Act.”

3. Rate of tax not determinable at the time of receipt of advance

As per Rule 50 of CGST rules 2017 where the rate of tax is not determinable, the tax shall be paid at the rate of eighteen per cent.

4. Nature of supply not determinable at the time of receipt of advance

As per Rule 50 of CGST rules 2017 where the nature of supply is not determinable, the same shall be treated as inter State supply.

5. What are the documents required to maintain for advance received?

At time of receipt of advance by a supplier from the recipient of supply, a receipt voucher to be issue as per rule 50 for CGST Rule, 2017. This advance receipt is required to be considered in FORM GSTR-1 Table 11A(1) or 11A(2).

6. What would be the treatment of such advances when tax invoice and actual supplies made?

If GST has already paid on advance receipts and subsequently the tax invoice has been issued for such advances. The register person shall pay net of Tax amount on actual supplies less amount of tax already paid on advances.

Such advances for which the tax Invoice have been issued is required to be considered in FORM GSTR-1 Table 11B(1) or 11B(2) and the same tax invoice shall have to be considered in Table nos. 4, 5, 6 or 7 as the case may be.

7. What would be the treatment if supply pursuance of such advances not made and tax invoice would not be issued?

In response to this question we suggest that kindly refer the circular issued by CBIC vide Circular No.137/07/2020 – GST, dated April 13, 2020, which clarified the challenges faced by the registered persons in adhering to the provisions of the Central Goods & Services Act, 2017 (“CGST Act”).

Issue No. 01

An advance is received by a supplier for a Service contract which subsequently got cancelled. The supplier has issued the invoice before the supply of service and paid the GST thereon. Whether the supplier can claim a refund of tax paid or he is required to adjust his tax liability in his returns?

Clarification

In case GST is paid by the supplier on advances received for a future event which got cancelled subsequently and for which invoice is issued before the supply of service, the supplier is required to issue a “credit note” in terms of section 34 of the CGST Act. The supplier shall declare the details of such credit notes in the return for the month during which such credit note has been issued. The tax liability shall be adjusted in the return subject to conditions of section 34 of the CGST Act. There is no need to file a separate refund claim. However, in cases where there is no output liability against which a credit note can be adjusted, registered persons may proceed to file a claim under “Excess payment of tax, if any” through FORM GST RFD-01.

Issue No. 02

An advance is received by a supplier for a Service contract which got cancelled subsequently. The supplier has issued receipt voucher and paid the GST on such advance received. Whether the supplier can claim a refund of tax paid on advance or he is required to adjust his tax liability in his returns?

Clarification

In case GST is paid by the supplier on advances received for an event which got cancelled subsequently and for which no invoice has been issued in terms of section 31 (2) of the CGST Act, the supplier is required to issue a “refund voucher” in terms of section 31(3)(e) of the CGST Act read with rule 51 of the CGST Rules, 2017. The taxpayer can apply for a refund of GST paid on such advances by filing FORM GST RFD-01 under the category “Refund of excess payment of tax”.

8. What documents shall require to issue where supply gets cancel?

In case where supplies get cancelled due to any reason and the advance amount is required to be refunded, Refund voucher is required to be issue rule 51 for CGST Rule, 2017 and the taxpayer can apply for a refund of GST paid on such advances by filing FORM GST RFD-01 under the category “Refund of excess payment of tax”.

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6 Comments

  1. Akshay Sharma says:

    Sir,

    Can you please share me the link of background ICAI wherein Advance and deposit is referred. Same is mentioned in your first paragraph of the article.

    please assist

  2. RAMANDEEP SINGH says:

    Dear Sir,
    Advance was received in J&K (Jammu) and ARV was issued ACCORDINGLY. The invoice raised in LEH with separate GSTIN NO. has been adjusted against the advance received in Jammu. Kindly provide solution.

  3. Rahul Ganesan says:

    Is there any time limit to adjust the advances paid on GST which got cancelled after 3 years – with the advance received for service after 3 years

  4. Anand Singh says:

    Service advances on which GST has been paid and got cancelled in subsequent month can be adjusted with the remaining advances of that subsequent month. Is it correct or refund is the only option. Please clarify

    1. Anand Yadav says:

      If service got cancelled, then you have to issue refund voucher against the receipt voucher on which you have paid GST in previous month. Hence to avoid future litigation you should claim refund only.

    2. Anand Yadav says:

      if the services getting cancel then you have to issue refund voucher. Hence to maintain the trail documents and to avoid future litigation You should apply for refund.

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