GST Liability on Advance Payment received by the Service Provider

[Rajeev Jain]

This is very important provision to understand the GST liability on the advance payment received against the supply of services by the Service provider such as Freelancer, Professionals, etc.

Many Services provider remain unaware of these tax provisions and they generally do mistake to pay GST on advance payment received, resulting payment of additional interest and penalty.

Now the question comes in our mind that when does liability for payment of GST arise ?

The liability to pay GST on services arises at the “Time of Supply” of services. Section 13 of CGST Act delas with this provision, according Sub-Section (2) of Section 13 prescribed that:

The time of supply of services shall be the earlier of the following dates, namely:

1. Invoice Date OR Payment Receipt Date, whichever is earlier;
2. Service Provision Date (if the invoice is not issued within the prescribed time limit) OR Payment Receipt Date, whichever is earlier.

Practically, the Time of Supply will be the invoice date or payment receipt date, whichever is earlier.              

Exemptions to this provision

In the following two cases, GST is not required to pay on advance payment received:

1. where the supplier of taxable service receives an amount up to Rs.1000/-.
2. This provision does not applicable in respect of sale of goods (Notification No.66/2017- Central Tax dated 15.11.2017.   

What to do when advance payment received by Service provider ?

When you receive advance payment from your customer/client, follow the below mention steps:

1. Issue a Receipt Voucher: This voucher must contain the detail prescribed by the law such as “Name, address & GSTIN of service” provider, Serial number, date, “Name, address & GSTIN of client”, description of services, Amount, GST Rate, GST Amount, etc.
2. Calculate Tax on the Advance payment: Gross up the amount received. This can be under stand with the example. Suppose Mr. Praveen received Rs.50,000/- in advance from his client and GST rate is 18%. Rs.50,000/- will be considered inclusive of tax.

GST liability will be:  [Rs.50,000/- x 18/118] = Rs.7,627/-

Value of Services: [Rs.50,000/- less Rs.7,6,27/-= Rs.42,373/-

3. Incorporate advance payment received in GSTR-1: Mention the detail in point No. 11A of Form GSTR-1.

Important Note: The client can not claim Input Tax Credit (ITC) of GST on advances till the receipt of services.

The author (CA Rajeev Jain) can be reached at rajiv@rajivudai.com.