Under the Central Goods and Services Tax Act, 2017, GST on advance payments is generally not applicable for goods (except for notified persons), but it is payable immediately for services at the time of receipt.
This difference arises because the time-of-supply rules for goods and services are treated separately under the GST law. Understanding these rules helps businesses avoid interest, penalties and incorrect tax reporting.
When is GST applied on advance payments?
To put it simply, tax becomes payable at the point defined by law as the time of supply, not necessarily when the final sale is completed. The specific time-of-supply provisions for goods and services are outlined below.
Advance received on the supply of goods
As per Notification No. 66/2017 – Central Tax dated 15 November 2017, most registered persons are not required to pay GST on advances received for the supply of goods.
This means GST liability arises only at:
- The date of issue of the invoice, or
- The last date on which an invoice is required to be issued under Section 31
The earlier linkage to receipt of payment has effectively been suspended for most taxpayers in the case of goods.
Note: The relaxation does not apply to taxpayers who opted for the composition scheme.
Advance received on supply of services
The advances received for the services are subject to GST. The general rule for determining the time of supply for services is the earliest of the following:
- The date of issue of the invoice, if issued within the prescribed time
- The date of provision of the service, if the invoice is not issued within the prescribed time
- The date of receipt of payment or advance
If the supplier neither issues the invoice within the prescribed time nor receives payment within the specified period, the time of supply will be determined based on when the recipient records the service in the books of account.
How are advance payments treated under the reverse charge mechanism?
Advance payments under the reverse charge mechanism (RCM) follow specific time of supply rules. Unlike the forward charge mechanism, GST liability does not arise merely on the payment of an advance. Instead, the liability is determined based on prescribed statutory timelines.
For services covered under RCM, tax becomes payable based on the earlier of:
- Date of payment to the supplier
- 60 days from the date of invoice
If the supplier does not issue an invoice within 60 days, the date of entry in the recipient’s books becomes relevant.
How to adjust advance payments after a GST rate change
If GST has already been paid on an advance at the old rate and the final supply is subject to a different rate, businesses must:
- Issue the final tax invoice reflecting the correct applicable rate
- Adjust the tax already paid on the advance in the invoice
- Pay the differential tax if the new rate is higher
- Claim adjustment or refund, if the new rate is lower
Illustration:
Advance received: ₹1,00,000
GST paid at 18% = ₹18,000
Later, the supply is completed when GST is reduced to 12%.
Correct GST on ₹1,00,000 at 12% = ₹12,000.
Excess tax paid = ₹18,000 – ₹12,000 = ₹6,000.
This ₹6,000 can be adjusted against output liability or claimed as a refund, subject to conditions.
What are the compliance requirements for advances
Here are some of the key compliance requirements for advances:
Receipt voucher
Under Section 31(3)(d), a registered person must issue a receipt voucher upon receiving advance payment. The voucher should contain:
- Amount of advance
- Applicable GST rate
- Tax amount
- Place of supply
Failure to issue receipt vouchers may lead to compliance issues during an audit.
Refund voucher
If an advance is received but the supply does not take place and the amount is refunded, a credit note must be issued. For services, GST already paid can be adjusted in subsequent returns, subject to statutory conditions.
GSTR-1
Any advance received for which an invoice has not yet been issued must be reported in Table 11A of GSTR-1. These advances must be clearly segregated into interstate and intrastate supplies. The gross amount is disclosed under “Gross Advance Received,” after which the applicable tax is reported separately. CGST and SGST are declared for intrastate supplies, while IGST is declared for interstate supplies. The tax calculated on such advances becomes part of the supplier’s total output liability.
When invoices are later issued against advances reported in earlier periods, the adjustment must be disclosed in Table 11B of GSTR-1.
Conclusion
Advance payments can impact GST liability earlier than many businesses expect. It is important to monitor receipts closely and align them with invoicing and supply timelines. Regular reconciliation between advance registers and GST returns helps avoid short payment, excess tax or reporting mismatches.
Automating compliance can reduce errors and save time. Tools like TallyPrime help record advance receipts, adjust them against invoices and calculate differential tax automatically.
