GST on Advance Receipts from Customers


With the implementation of GST as a new law, it brings some provisions which creates disturbances in the implementation vis-a-vis adoptability by taxpayers, professionals and judiciary. One of such provision is GST liability on advances receipts.

There are so many questions on mind in respect of this, like:-

  • What is the meaning of advance receipts ?
  • Which advances are taxable?
  • Whether security deposit/ deposit would be considered as advance receipts?
  • What would be the rate of tax where multi-rated items supplied by supplier?
  • What would be place of supply where advances paid by head office for supplies to different locations?
  • What would be the treatment of such advances when actual supplies made?
  • What would be the treatment if such advances remain unutilised and refunded?
  • What are the documents required to maintain for such advances?

There is no definition provided under GST laws for the “Advance receipts”.

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. 

e.g. if a supplier agreed to supply 1000 cases of cold-drinks to a customer within one week and collects Rs 15,000/- as advance before actual supply to apply such amount against such supplies, this amount would be treated as advance.

However, where the same supplier has received Rs 15,000/- with the obligation that he will kept this amount as security deposit against the obligation of recipient to receive 1000 cases and pay 100% after completion of supply, then the amount would not be considered as advance.


Relevance of concept of “advance receipts”

As per 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 advance even if original supply of goods or services or both did not happen yet and supply would be at some later date.

These provisions provides that time of supply of goods or services shall be earlier of “event of issue of tax invoice” and “receipt of payment”.

Due to this provision, it becomes necessary to understand the term ‘advance receipt’ in very practical manner with the consequences of legal liability.


Exceptions of taxability of advance receipts

As per CGST Notification 66/2017-CGST dated 15/11/2017, there is no requirement to pay tax on advances meant for INTRA-STATE supply of goods by normal registered persons, (i.e. registered persons other than Composition Dealers). Text of said notification has been reproduced below:-

“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.”

In this notification, it is being specifically provided for Central Tax. It means that the transactions which are liable for “Central Tax” are only eligible transaction which are covered by this notification. There is no parallel notification under IGST Act for the same.

Further, this notification is only for goods and not for services. Thus, any amount received as advance for supply of services would be liable for tax on receipt basis.

This notification is not applicable on Composition dealers. Therefore, any amount received by such dealers “as advance” is liable for tax on receipt basis.

This notification is applicable only for those advances which are received on or after 15th November 2017.


Deposits are not taxable like advances

A deposit can be described as an amount given to the supplier with an obligation entrusted upon the supplier to keep it safely. The essence of the deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made upon fulfilment of certain conditions or to apply it as consideration at a future date depending on the terms of the contract.

However, as and when this deposit is applied as consideration under the contract against the supply made or agreed to be made, it becomes an advance receipt.

Example:- Let us assume that a tenant (under Rent Agreement) is required to pay a three-month deposit to the landlord in an eleven-month contract. Upon default of the rent of any one month, the deposit is partly deducted as the rental for that month. Only to the extent of such deduction towards the rent of that month, it will be considered as part of the taxable value.

Retention money is a classic example of deposit.

To elaborate, the recipient may withhold a certain part of the consideration payable to a supplier and keeps a part of that amount as deposit with himself. Only when the given obligations are discharged by the supplier as per the terms of the contract, this retention money is released. This retention money is not included in the value if returned as such to the supplier. However, if the supplier fails to fulfil the given obligations as per the contract, the recipient may charge the said retention money and apply it against the default. When applied, the said retention money becomes chargeable to tax. It may be pertinent to point out here that the money retained will not reduce the value of the original contract of supply. This means the principal supply will continue to be valued at the full amount without any deduction for the retention money.


What would be the rate of tax where multi-rated items supplied by supplier?

As per Rule 50 of CGST rules, where receipts as advance may not be able to allocate for particular supply, it is recommended to pay GST at the rate of 18%.


What would be place of supply where advances paid by head office for supplies to different locations?

As per Rule 50 of CGST rules, where it is difficult to determine the place of supply, transaction may be regarded as Inter-State supply.

Alternatively, all the locations under contract may be considered as place of supply. Amount of advance may be allocated to each place of supply in the same proportion as of the total amount of consideration applied for particular location to the gross amount of consideration under contract for all locations.


What would be the treatment of such advances when actual supplies made?

Where GST already paid on advance receipts, tax to be paid net of Tax amount on actual supplies less amount of tax already paid on advances.


What would be the treatment if such advances remain unutilised and refunded?

This is very awful situation under GST. CBIC has recently issued a Circular 137/7/2020-GST dated 13/04/2020 to provide clarification on such situations. Followings are the cases and their clarifications are given in this circular:-

Case 1: An advance is received by a supplier for a Service contract which subsequently got cancelled. The supplier has issued the invoice before supply of service and paid the GST thereon. Whether he can claim refund of tax paid or is he 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 supply of service, the supplier is required to issue a “credit note” in terms of section 34 of the CGST Act. He 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.

Case 2 :- 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 he can claim 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, he 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.

The taxpayer can apply for refund of GST paid on such advances by filing FORM GST RFD-01 under the category “Refund of excess payment of tax”.


What are the documents required to maintain for such advances?

When an advance is received by a supplier from the recipient of supply, a receipt voucher to be issued. It should reflect following components:

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

(b) a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;

(c) date of its issue;

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

(e) description of goods or services;

(f) amount of advance taken;

(g) rate of tax (central tax, State tax, integrated tax, Union territory tax or cess);

(h) amount of tax charged in respect of taxable goods or services (central tax, State tax, integrated tax, Union territory tax or cess);

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

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

(k) signature or digital signature of the supplier or his authorised representative:

Where, advance amount is required to be refunded due to any reason, Refund voucher is required to be issued. A refund voucher should contain followings contents:

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

(b)  a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;

(c) date of its issue;

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

(e)  number and date of receipt voucher issued in accordance with the provisions of rule 50;

(f)  description of goods or services in respect of which refund is made;

(g)  amount of refund made;

(h)  rate of tax (central tax, State tax, integrated tax, Union territory tax or cess);

(i)  amount of tax paid in respect of such goods or services (central tax, State tax, integrated tax, Union territory tax or cess);

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

(k) signature or digital signature of the supplier or his authorised representative.


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