GST on Advance Payment: How to handle GST in Advance Payments?

GST on Advance Payment

Why GST on Advance Payment?

Government of India (GOI) rolled out GST from 1st July 2017. Along with different GST rates for items, GOI has come with many news rules to address the business needs. One such is “GST on Advance Payment” from vendors and we have to apply GST on the total advance money received or paid. Now Business community is confused on how to handle it as there is no clarity from anyone. Business owners are more worried about handling and meeting compliance than doing their business. So we have come with few series on how these special cases are handled.

For a long time, there was no TAX applied on the money received or paid back as advances from Business. Government sensed that many business owners receive the Loan amount and show it books as “Advance” money and pay the Interest to the lender in Cash form. To handle these cases, GOI decided to apply this model as it provides business owners to adjust this tax amount when the Advance money is adjusted against the Supply of materials.

How GST on Advance Payment works? Give an Example.

GST provision is to decide the timing of supply of goods under GST. Timing of supply of goods assumes importance in knowing when to pay the tax liability. As per the GST law, the earliest of the following, taxes have to be discharged on supply of goods:

Date of supply of goods or Date on which goods are made available. When you make a Goods Receipt Notes.
Date of invoice for supply of goods.
Receipt of advance payment towards such supply, but the materials is not yet supplied.

An Example to explain more, Say, Vendor paid advance money before the supply of goods or services will have to pay a GST on it. At the time of receiving advance, Supplier will have to give the Receipt voucher that’s been applied with GST. The receipt voucher should mention Name of supplier, his Address and GSTIN etc. At the time of filing of GST return the details of such receipts are to be mentioned in the return.

If a person gave an order for buying commodity amounting to Rs. 10 Lakhs and gave advance of Rs. 5 Lakhs. The vendor will issue receipt voucher mentioning CGST and SGST tax along with basic amount (Using Tax Include formula i.e (Rs 5,00,000/118)×100= Rs. 423,728.8 Basic, 9% on it will be CGST and 9% of basic will be SGST (assuming that Customer is with in the same State). Financial entries are done as below.

Dr Bank Account Rs 500,000

Cr. Advance Against Sales Order Rs. 423,728.00

Cr. CGST on Advance Payment-Liability Rs. 38,135.60

Cr. SGST on Advance Payment-Liability Rs. 38,135.60

Important points to note

The buyer of the goods or services will not get GST credit on advance payment, he is eligible to get GST credit (Full GST amount ) only when supplier supplies the goods or services and issue tax invoice to buyer.
If supplier is not sure about GST rate while taking advance payment he may apply GST @ 18%.
In GST regime everyone must keep proper records while making and receiving advance payment against supplies.