A customer paid an advance: when does GST become payable?

A customer has transferred money to your company before you have delivered anything. Maybe it is a booking amount, a deposit, or the first instalment of a project. The bank shows the credit. No invoice has gone out yet.

The question every accounts team asks: do we owe GST on this money today?

The answer depends on whether you supply goods or services. The Act treats the two differently, and for goods a separate notification changes the outcome. Both are covered below, with a clear line between what the Act says and what we have only seen described in secondary material.

When GST becomes payable

GST is not payable merely because money arrives. The liability to pay tax on goods arises at the "time of supply" as determined under s.12, and on services at the time of supply as determined under s.13 (s.12(1) and s.13(1), Central Goods and Services Tax Act 2017, "CGST Act"). So the real work is finding the time of supply.

Receiving money is one trigger. Issuing an invoice is another. Usually the earlier one fixes the date.

Advance for services: tax can be due when you receive it

For services, s.13(2) fixes the time of supply as follows (s.13(2), CGST Act 2017).

• Clause (a): the date you issue the invoice, if you issue it within the period prescribed under s.31, or the date you receive payment, whichever is earlier.
• Clause (b): the date you provide the service, if the invoice is not issued within that period, or the date you receive payment, whichever is earlier.
• Clause (c): the date the recipient shows the receipt of the service in his books, only where clause (a) or clause (b) does not apply.

Read clauses (a) and (b) together. In both, the date of receiving payment competes with the other date, and the earlier one wins. So if your customer pays an advance before you invoice and before you perform the service, the date of receipt of payment is the earlier date. The time of supply for that advance falls in the period in which you received it.

Three details matter.

What counts as "the date of receipt of payment". It is the date the payment is entered in your books of account or the date it is credited to your bank account, whichever is earlier (Explanation to s.13(2), CGST Act 2017). If the money reaches your bank on 30 November but your accountant books it on 3 December, 30 November is your date.

Only the advance is covered. The supply is deemed made "to the extent it is covered by the invoice or, as the case may be, the payment" (Explanation to s.13(2), CGST Act 2017). A customer who pays ₹2 lakh against a ₹10 lakh contract creates a time of supply for ₹2 lakh now. The remaining ₹8 lakh follows its own invoice or payment date later.

Small excess amounts. Where a supplier of taxable services receives an amount up to ₹1,000 in excess of the amount shown in the tax invoice, the time of supply for that excess, at the supplier's option, is the date of issue of the invoice for it (proviso to s.13(2), CGST Act 2017).

If your company is the recipient and tax is payable on reverse charge, a different rule applies: s.13(3) fixes the time of supply by reference to the date of payment in the recipient's books or bank, and a date sixty days after the invoice, and the position needs separate analysis (s.13(3), CGST Act 2017).

Advance for goods: the Act, and a notification

For goods, s.12(2) says the time of supply is the earlier of two dates: the date of issue of the invoice, or the last date by which the supplier is required to issue it under s.31; or the date on which the supplier receives the payment with respect to the supply (s.12(2)(a) and (b), CGST Act 2017). Read on its own, clause (b) would make an advance for goods taxable on receipt, like an advance for services.

The compilation of the CGST Act and Rules published by the GST and Indirect Taxes Committee carries a note against s.12 that changes this. It records that, under the power in s.148 of the CGST Act, Notification No. 66/2017-CT dated 15.11.2017 specifies the registered person who did not opt for the composition levy under s.10 (other than a registered person making supply of specified actionable claims, as defined in s.2(102A)) as the class of persons who shall pay central tax on the outward supply of goods at the time of supply specified in s.12(2)(a), including where s.14 applies. The note then says: "no tax will be payable on receipt of advance in case of goods."

An ICSI GST newsletter of December 2017 describes the same notification in the same terms: all taxable persons other than composition suppliers pay GST on outward supply of goods at the time of issue of the invoice or the last date for issuing it.

What this means in plain terms, as reported in those two secondary sources:

• Regular supplier of goods (not under composition, not dealing in specified actionable claims): GST on an advance for goods is reported as not payable when the advance arrives, but on the invoice date or the last date by which the invoice had to be issued.
• Supplier of services: s.13(2) applies as above, and the notification described for goods is not a services rule.

We have not read the notification itself as part of preparing this article, and we have not checked whether it has since been amended or replaced. The s.12(2)(b) text of the Act still reads as above. Before relying on the goods position for any large advance, read Notification No. 66/2017-CT as currently on the CBIC website, together with any amendments, and confirm how your State tax treats it.

When the rate changes in between

Time of supply decides which GST rate applies. If the rate changes between the advance and the supply, s.14 applies "notwithstanding" ss.12 and 13 (s.14, CGST Act 2017). A few of its outcomes:

• Goods or services supplied after the rate change, payment received before it, invoice issued after it: the time of supply is the date of issue of the invoice (s.14(b)(iii)).
• Goods or services supplied after the rate change, invoice issued and payment received before it: the date of receipt of payment or date of issue of invoice, whichever is earlier (s.14(b)(ii)).
• Goods or services supplied before the rate change, payment received before it, invoice issued after it: the date of receipt of payment (s.14(a)(iii)).

There is also a proviso: the date of receipt of payment is the date of credit in the bank account if that credit is after four working days from the date of change in the rate (proviso to s.14, CGST Act 2017). Map your advance against the exact limb of s.14 before you decide the rate.

The two clocks

Clock 1: the tax. For an advance on services, the time of supply is the earlier of the dates in s.13(2), which in an advance case is typically the date you receive payment. You report and pay tax in the return for the period in which that date falls. For goods, the reported position is that the clock starts at the invoice date or the last date to issue the invoice (s.12(2)(a), read with Notification No. 66/2017-CT as described above).

Clock 2: the voucher. A registered person must, on receipt of advance payment with respect to any supply of goods or services or both, issue a receipt voucher or any other document, containing the prescribed particulars, evidencing receipt of such payment (s.31(3)(d), CGST Act 2017). The section does not carve out goods. If you consider that the notification removes the need for a voucher on a goods advance, confirm that against the notification text before you drop the document.

A voucher also helps your registered customer support their own books. If you later issue the tax invoice, it should adjust the advance already taxed, so that GST is not counted twice.

The tax invoice for taxable services is due within thirty days from the date of supply of the service (rule 47, CGST Rules 2017). Where the supplier is an insurer, a banking company or a financial institution including an NBFC, the period is forty-five days (first proviso to rule 47).

Step by step: what your team does

1. Check it is an advance. The voucher rule applies to advance payment with respect to a supply (s.31(3)(d)). Where the character of the receipt is unclear, such as a refundable deposit, have it reviewed on its facts.

2. Decide goods or services. For services, apply s.13(2). For goods, read the Act and the notification as described above and confirm the current text.

3. Fix the date of receipt. Use the earlier of the bank credit date and the date of booking (Explanation to s.13(2)).

4. Issue the receipt voucher. Rule 50 lists the particulars: your name, address and GSTIN; a consecutive serial number of up to sixteen characters, unique for the financial year; date of issue; the recipient's name, address and GSTIN or UIN if registered; description of goods or services; amount of advance taken; rate and amount of tax; place of supply with State name and code for inter-State supply; whether tax is payable on reverse charge; and a signature or digital signature of the supplier or his authorised representative (rule 50, CGST Rules 2017).

5. Use the default rules when facts are unclear. If the rate of tax is not determinable at the time of the advance, the tax is paid at eighteen per cent. If the nature of supply is not determinable, it is treated as inter-State supply (provisos to rule 50).

6. Keep a separate account of advances. Every registered person must keep and maintain a separate account of advances received, paid and adjustments made to them (rule 56(3), CGST Rules 2017).

7. Refund voucher if the supply never happens. If you issued a receipt voucher but no supply is made and no tax invoice is issued, you may issue the payer a refund voucher against that payment (s.31(3)(e), CGST Act 2017). The refund voucher carries the number and date of the receipt voucher, the description of the goods or services, the amount refunded, the rate and the tax paid (rule 51, CGST Rules 2017).

What not to do

• Do not wait for the invoice on a services advance. The invoice is not the only trigger. Receipt of money can fix the date earlier (s.13(2)(a) and (b)).
• Do not apply the goods position to services. The notification described in the compilation concerns the outward supply of goods.
• Do not assume the goods position if you are under composition. The notification as described covers persons who did not opt for the composition levy under s.10.
• Do not skip the receipt voucher on the strength of memory. The Act asks for a voucher on receipt of "advance payment with respect to any supply of goods or services or both" (s.31(3)(d)).
• Do not leave a cancelled order open. Where no supply is made and no tax invoice is issued, the refund voucher route in s.31(3)(e) is the one the Act provides.

What to do now

• Next step: list every advance received in the current month. Mark each one as goods or services, and note the date it was credited to the bank (Explanation to s.13(2), CGST Act 2017).
• Deadline: for services, the time of supply is fixed by s.13(2), usually the date of receipt, so the tax belongs to the return period in which the payment was received. Issue the receipt voucher for each advance (s.31(3)(d), CGST Act 2017). Check the current due date for your return on the GST portal before you file.
• Consequence if you miss it: the time of supply has already arrived, so the liability exists for that period whether or not you raised any document (s.13(1), CGST Act 2017). Interest on delayed payment of tax is provided in s.50 of the CGST Act; check the current rate and any late fee on the GST portal before you file.

Have a CA review your facts before you act or file.

Frequently asked questions

1. My customer paid a booking amount for a service next quarter. Do I pay GST now?
Under s.13(2)(a) and (b), the date of receipt of payment competes with the invoice date or the date of provision, and the earlier one wins, so ordinarily yes. Only the amount received is taxed now (Explanation to s.13(2), CGST Act 2017).

2. I sell goods and my customer paid an advance. Is GST payable now?
Section 12(2)(b) makes receipt of payment a trigger. The compilation of the Act records that Notification No. 66/2017-CT dated 15.11.2017, issued under s.148, requires regular suppliers of goods (other than composition taxpayers and persons supplying specified actionable claims) to pay at the s.12(2)(a) time, and summarises this as no tax on receipt of an advance for goods. Read the current notification text before you rely on it.

3. What if the invoice for services is issued after thirty days?
Rule 47 requires the invoice within thirty days from the date of supply of the service, and forty-five days for insurers, banks and financial institutions including NBFCs (rule 47, CGST Rules 2017). If the invoice is not issued within the prescribed period, the date of provision of the service competes with the date of receipt of payment (s.13(2)(b), CGST Act 2017).

4. The order was cancelled and I have returned the money. What document do I issue?
A refund voucher, provided you issued a receipt voucher, no supply was made and no tax invoice was issued (s.31(3)(e), CGST Act 2017). It must quote the number and date of the receipt voucher (rule 51, CGST Rules 2017).

5. I do not know the rate of tax on the advance. What do I charge?
Where the rate is not determinable when you receive the advance, tax is paid at eighteen per cent (proviso to rule 50, CGST Rules 2017).

6. The GST rate changes next week and the customer has paid. Which rate applies?
It depends on the order of three events: payment, invoice, supply. Section 14 sets out each combination, with a proviso on bank credit within four working days of the change (s.14, CGST Act 2017). Work out which limb fits and apply that rate.

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See Also

• How soon must we issue a GST invoice for services?
• ASMT-10 scrutiny notice: how to reply within 30 days
• Do we pay GST under reverse charge on freight, advocate fees and director fees?