Implications of GST on Advances Received for Future Supply:

When an advance is received for any supply, the time of supply is fixed at the time the advance is received, regardless of whether the supply is actually made. Consequently, GST must be paid relative to the time at which any advance is received if any. This necessitates adherence to a few procedures, documentation, and reconciliation of taxes paid on advances and supplies made.

The time of supply determines when a taxpayer must pay tax on a particular supply. The timing of supply is governed by Sections 12 to 14 of the 2017 CGST Act. According to the aforementioned provisions, the time of supply is determined by the time the supplier receives payment for the supply, as well as a few other references, such as invoice issuance, receipt of goods, etc. In general, the time of supply corresponds to the earliest invoice issuance or payment receipt.

A “supply” is considered to have been made to the degree that it is covered by the invoice or, if appropriate, the payment, as per explanation 1 to Section 12 of the CGST Act, 2017. For instance, a Rs. 10 lac advance is received for a Rs. 1 crore future supply. The time of supply will be established when the advance is received, up to a maximum of Rs. 10 lacs, and for the remaining Rs. 90 lacs, it will be determined using the date the invoice was issued as well as other factors.

Notification no. 66/2017 dated 15.11.2017:

It is common for supplies to be canceled after advance payment. Depending on the terms of the agreement, the received advances may be refunded, forfeited, or applied to future supplies. All of this may necessitate distinct tax treatment.

Government Notification No. 66/2017, dated 15.11.2017, exempts all suppliers of goods who have not opted for the composition scheme from the obligation of paying GST on Advances received. This is in recognition of the fact that small business owners may be burdened with GST compliance issues relating to advances. For these categories of taxpayers, the time of supply does not occur until the time of invoice issuance, and they must discharge their GST liability accordingly. However, the service provider is required to pay GST when receiving advances.

As a result of a decision made by the GST Council at its meeting on 10.11.2017, a number of products formerly subject to the highest tax bracket of 28% have been lowered to the 5/12/18% tax bracket. The revised rates are also reflected in Notification No. 41/2017-Central Tax (Rate) dated November 14, 2017, which went into effect on that date. It is possible that the supplier received advances when the rate was 28% and paid tax on them. The rate has been reduced to approximately 18 percent. Now, assuming the supply occurred after the change in tax rate and the invoice was also issued after the change in the tax rate, section 14 of the CGST Act defines the time of supply as the date of invoice issuance. Therefore, the 10 percent additional tax paid can either be offset against the remaining tax payment for that specific supply or claimed as a refund.

Article 31 (3) (d) of the 2017 CGST Act:

Upon receiving advance payment for any supply of goods or services or both, a registered person is required under Section 31(3)(d) of the CGST Act, 2017, to issue a receipt voucher or any other document including the following information:

Rule 56(3) of the 2017 CGST Rules:

According to Rule 56(3) of the Rules, every registered person is required to keep and maintain a separate account for all advances received, paid, and adjustments made to such advances.

Table 11A of FORM GSTR-1 captures information pertaining to advances received, rate-wise, during the tax period, along with tax to be paid thereon and respective place of supply (POS). Table 11B represents the adjustment of tax paid on advances received and reported in prior tax periods to invoices issued in the current tax period. The information regarding advances would only be included in Table 11A if the invoice was not issued during the same tax period that the advance was received. In Table 11B, adjustments relating to advances received in a prior tax period but invoices issued in the current tax period would be reflected.

Advances received by a Composition Dealer:

 The composition dealer is exempt from paying tax on advances received if they pertain to his outgoing supplies.

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