An advance payment is money you receive from a customer before delivering goods or providing services. Under GST, the tax treatment of this advance depends on whether it’s for goods or services.
GST on advance payments applies when an individual makes a payment ahead for the said goods and service and before receiving the receipt of goods or service. The individual usually makes an advance payment when the supplier requires an advance payment as a safeguard against non-payments, to cover the costs for supplying a product or rendering of a service. Usually, Goods and Services Tax (GST) is imposed on a supplier at the time of receipt of payment with respect to the supply of goods and services. However, in some transactions, an advance is first paid by the recipient of the goods or service to the supplier.
What is an advance payment?
GST on advance payments: Under GST, the treatment of advance payments depends on the nature of the supply and the time of supply. The following scenarios can arise when it comes to GST on advance payments:
- Supply of Goods: If a supplier receives an advance payment for the supply of goods, GST becomes applicable on the advance received. The supplier is required to pay GST on the advance in the same manner as if the supply has been made. The tax liability arises at the time of receiving the advance payment.
- Supply of Services: For services, the GST on advance payments is slightly different. Until the time of supply, i.e., when the service is actually performed, GST is not applicable on the advance payment. The supplier is not required to pay GST on the advance received until the time of supply.
- Time of supply: The time of supply plays a crucial role in determining the tax liability on advance payments. For goods, the time of supply is determined based on the issuance of an invoice or the receipt of payment, whichever is earlier. However, for services, the time of supply is determined based on specific criteria outlined in the GST law, such as the completion of the service or the issuance of an invoice.
Receipt of Advance Payment
Time of supply determines the date of payment of tax. In general, the time of supply refers to the period in which the supplier receives the payment on delivery of goods, maybe before the issuance of GST invoice. In some cases, a supplier would receive an advance payment from supplying the goods in future. Under this kind of a circumstance, GST has to be paid at the time of receipt of the advance payment irrespective of the fact whether the supply is made or not
Exemption of GST on Advance Payment Received
As per the GST notification on 15th December 2017, suppliers of goods who have not opted for Composition Scheme are exempted from payment of GST on receipt of the advance payment. However, the supplier of services should pay GST at the time of receipt of the advance payment.
FAQs
Q1: Is GST applicable on advance payments for goods and services?
Yes, GST is applicable on advance payments for both goods and services. The treatment of GST on advance payments varies depending on the nature of the supply and the time of supply.
Q2. How is the time of supply determined for services?
The time of supply for services is determined based on specific criteria outlined in the GST law, such as the completion of the service or the issuance of an invoice. GST liability on the advance payment arises accordingly.
Q3. Are there any penalties for non-compliance with GST on advance payments?
Non-compliance with GST regulations, including the treatment of advance payments, may attract penalties and fines as per the provisions of the GST law. It is crucial to adhere to the guidelines and fulfill the tax obligations to avoid any penalties.
Q4. Can a recipient claim input tax credit (ITC) on the GST paid by the supplier on the advance payment?
If the recipient is a registered person under GST, they can claim input tax credit (ITC) on the GST paid by the supplier on the advance payment. However, if the recipient is not registered under GST, they cannot claim any ITC on the advance payment.
Q5. How is the time of supply determined for goods?
The time of supply for goods is determined based on the earlier of either the issuance of an invoice or the receipt of payment. GST liability on the advance payment arises at this point.
