A major GST rate change has already come into effect, creating a transitional period where regular business transactions can become tricky. One common puzzle business owners face involves advance payments: what happens if you collected an advance at the old, higher tax rate, but the final supply of goods is now subject to the new, lower GST rate?
For example, you collected 12% GST on an advance, but the final sale is now only subject to 5% GST. So how do you manage this situation correctly to avoid errors in your books and stay compliant?
This guide walks you through a detailed, scenario-based explanation of how to handle such cases, keep your books accurate, and stay compliant. Plus, we’ll show how TallyPrime can simplify the entire process.
The core problem: Advance payment at old rate, supply at new rate
Example: Handling GST on advance payment after rate change
Suppose a customer pays you an advance of ₹20,000 on 20th September, when the GST rate is 12%. The GST portion in this advance works out to approximately ₹2,142.86.
Now, you deliver the goods on 25th September, when the GST rate has dropped to 5%. The value of the supply is ₹30,000, so the actual GST on the final sale is ₹1,500.
This means you’ve already collected ₹2,142.86 as GST on the advance, but the correct GST on the final sale is only ₹1,500. The excess GST of ₹642.86 needs to be reversed by issuing a credit note for the difference.
The solution: Issuing a credit note for the GST difference
Under GST law, the correct way to handle this adjustment is by issuing a credit note. A credit note is a commercial document issued by a seller to a buyer to rectify errors in an invoice, such as overcharging or returning goods. In this case, its purpose is to reverse the excess GST charged on the advance payment.
Issuing a credit note accomplishes two critical things:
- Reduces your tax liability: It formally informs the government that your output tax liability has decreased by the amount on the credit note (in our example, ₹7).
- Adjusts the customer's account: It credits the customer's ledger, effectively returning the excess amount to them, which can be adjusted against their final payment.
Step-by-step guide to managing the adjustment
Let's break down the process from start to finish.
Step 1: Record the advance receipt
On 20th September, the customer pays an advance of ₹20,000. The GST portion at 12% is calculated as:
- Cash/Bank Account Debited: ₹20,000
- Customer's Account Credited: ₹17,857.14 (Supply value portion)
- Output GST (12%) Payable Credited: ₹2,142.86
At this stage, your GSTR-1 for September will show a tax liability of ₹2,142.86 from this advance payment.
Step 2: Create the sales invoice after the rate change
On 25th September, you deliver the goods. The supply value is ₹30,000, and the new GST rate is 5%, making the GST: You now adjust the advance of ₹20,000 against the final invoice. However, since you’ve already collected ₹2,142.86 as GST, there’s a GST differential of ₹642.86 in your books.
Step 3: Issue a credit note for the GST differential
To correct the excess tax collected, issue a credit note of ₹642.86.
- Reason: "Correction in Invoice" or "Decrease in Tax Rate"
- Ledger impact:
- Output GST (12%) Payable Debited: ₹642.86 (reduces liability)
- Customer's Account Credited: ₹642.86 (returns excess to customer)
This step ensures your GST books accurately reflect the new, lower tax rate.
Step 4: Final settlement with the customer
Here’s how the customer’s final account looks:
- Invoice Value: ₹30,000 + GST ₹1,500 = ₹31,500
- Less Advance Received: ₹20,000
- Less Credit Note for GST: ₹642.86
- Final Amount Due from Customer: ₹10,857.14
The customer pays the remaining balance, and your books are now accurate.
Stay compliant during the GST transition with TallyPrime
Handling advance payments across different tax rate periods doesn't have to be a source of stress. By understanding the process—receive the advance, issue the invoice at the new rate, and issue a credit note for the difference—you can manage these transactions accurately.
While the process is logical, the execution can be prone to error if done manually. Using an intelligent business management software like TallyPrime removes the guesswork and risk. It automates the calculations, ensures the correct documents are created, and guarantees your GST returns are flawless.
As your business navigates the GST rate changes, lean on the power of technology to handle the complexities. Let TallyPrime manage the debits, credits, and compliance, so you can focus on serving your customers and growing your business.
