GST ON ADVANCE PAYMENTS: A COMPREHENSIVE GUIDE
When a business receives money in advance before delivering a product or offering a service, in such cases it becomes obligatory for the businesses to check if such advances attract output tax responsibilities under India’s Goods and Services Tax (GST) system.
In this blog, we’ll break down what it really means when you have an advance received from a customer under GST, walk you through real-life scenarios, and help you understand the evolving regulations around it.
What Does Advance Payment Mean Under GST?
Simply put, an advance payment is any money a business gets before the goods are shipped or the service is delivered. This practice is quite common across various sectors—like real estate, construction, consulting, event planning, manufacturing, and online retail.
Now, under GST rules, advance payments are tied to what’s called the “time of supply”—a concept that helps determine exactly when the GST liability kicks in. This is where things start to differ based on whether the advance is for goods or services.
Understanding this difference is key. The way GST is applied to advance received for services isn’t always the same as how it works for goods. So, knowing how each scenario works will help you avoid confusion and stay on the right side of the law.
Applicability of GST on Advance Received for Services
As per section 13 of the CGST Act, in case of supply of services, the time of supply for will be earliest of the following:
- Date of issue of invoice,
- Date of receipt of payment.
Hence, when a business receives an advance payment for a service, GST becomes payable at the time of receiving the payment. The supplier must issue a document in the form of receipt voucher and deposit the applicable GST.
Example:
ABC Consultants receives ₹50,000 on 1st June 2025 as advance for a consulting project to be delivered on 20th June. GST must be paid for this amount in the June month’s return, even if the service is yet to be rendered.
Applicability of GST on Advance Received for Goods
Originally, GST was applicable on all advances received, whether for goods or services. However, Notification No. 66/2017 - Central Tax, dated 15th November 2017, relaxed this rule for goods.
Now, GST on advance received for goods is not applicable for taxpayers (other than those under the composition scheme or dealing in notified goods). This means tax liability arises only when the invoice is issued or goods are delivered, whichever is earlier.
Example:
XYZ Traders receives ₹1,00,000 as advance on 5th June 2025 for a shipment of steel pipes. Since XYZ is not in the composition scheme and steel is not a notified good, no GST is payable on the advance. Tax liability will arise upon issuance of invoice or delivery.
Key Compliance Requirements for Advance Payments
- Issuance of Receipt Voucher
- Name and address of the supplier and recipient
- GSTIN of both parties
- Date and amount of advance
- Description of goods or services
- Applicable tax rate and amount
- HSN or SAC code
- Adjustment in Invoice
- Reporting in GST Returns
- Accounting Treatment
Whenever an advance is received for services, the supplier must issue a document in the form of receipt voucher containing the following as mentioned below:
When the final invoice is issued, the advance received (and GST already paid) should be deducted from the invoice amount to avoid double taxation. The invoice should clearly reflect the adjustment.
The Advance payments received for services and the relevant GST amount paid must be reported under Table 11A of Form GSTR-1.In the subsequent return, adjustments must be shown after the invoice is issued.
Businesses should record the advance and GST component separately in their books. This helps in clear reconciliation of GSTR-1, GSTR-3B, and books of accounts effectively.
Special Considerations for GST on Advance Payment
- Refund of Advance Payment
- Advance from Unregistered Customers
- Reverse Charge Mechanism (RCM)
- Composition Scheme Dealers
If the transaction gets cancelled and the advance is refunded, the supplier can issue a refund voucher. This document allows the supplier to reverse the GST liability previously paid.
Even if the advance is received from an unregistered person, the supplier is liable to pay GST on the amount (in case of services). The place of supply and applicable rate must be considered while calculating the GST.
Advance payments under Reverse Charge Mechanism are treated differently. The recipient is liable to pay GST under RCM. However, if an advance is paid by a registered business to an unregistered person (where RCM applies), GST needs to be paid by the recipient and reported accordingly.
Dealers under the Composition Scheme are not required to pay GST on advances. They pay tax at a flat rate on turnover when the supply is actually made.
Impact on Business Operations
The treatment of GST on advance received from customer under GST directly impacts:
- Working capital: Paying GST before making the supply can strain liquidity.
- Documentation: Proper issuance and tracking of vouchers is required.
- System setup: ERP and accounting software must be configured to track advances and tax liability.
- Always assess whether the advance is for goods or services to determine GST applicability.
- Issue receipt vouchers with complete details.
- Pay GST on advance for services immediately; delay for goods unless otherwise notified.
- Adjust advances in the final invoice to avoid double taxation.
- Use proper accounting and software tools to track and report advances in GSTR-1 and GSTR-3B.
- Issue refund vouchers for cancelled orders to reverse tax liability.
Businesses must also consider sector-specific implications. For instance, real estate and event management industries often receive large advances and must ensure timely GST compliance.
Summary and Best Practices
It becomes very crucial to have an idea related to provisions of GST on advance payments so as to avoid any non-compliances. With the clear knowledge of the detailed provisions, the unnecessary penalties and potential notices can be mitigated by the business houses and hence the core business processes can be run smoothly.