GST liability on supply of goods on advance


By H S Prasad, Coromandel International Limited

AT present, under Central Excise and VAT laws the discharge of duty or tax liability is triggered once goods are removed from factory or sales takes place in the case of central excise and VAT respectively. There is certainty and with reasonable measures, liability of duty and tax are determined without difficulty. Industry has never faced any difficulty in determining the timing to discharge duty or tax liability.

So much of hype has been created for GST that it would be more user friendly, easy to comprehend and to follow and more focused on ease of doing business. But all this seems to be mere hoax. It seems lawmakers have drafted it with self-centric of keeping garnering of more revenue giving no scope for ease of doing business. The new laws should not be a burden in compliance, rather it should facilitate the business in this way the government can also garner more revenue. If it becomes so complicated, an assessee instead of focusing on its business, has to worry on compliance of complicated tax wherein non-compliance may lead to harsh provisions for penalty and even prosecution.

There is a separate provision to determine the timing of supply of goods under GST. Timing of supply of goods assumes importance in knowing when to discharge the tax liability. As per the model GST law, the earliest of the following, GST has to be discharged on supply of goods:

a) Date of supply of goods or Date on which goods are made available

b) Date of invoice for supply of goods

c) Receipt of payment of advance towards such supply

d) Entry of such supplies in the books of recipient

Normally in business, it is expected to collect advances from customers to make him committed to lift the goods ordered which also gives reasonable assurance to the supplier (seller) that his goods will not go waste as unsold especially in the case of customized goods. Advances also collected when the goods are in short supply and to give priority in supply of such goods. Also that it gives financial support to the supplier. Thus there are various reasons for collection of such advances by the supplier during the course of doing his business. Under GST laws he has to be more vigilant for collecting of such advances as certain portion of the advances he has to part with the government even though he has not supplied (sold) the goods. Collection of advance is the timing of supply of goods, resulting into payment of GST on advances. This article is confined to the complications involved in compliance of discharge of tax liability on advances which is as follows –

Managing of large customers with advances in some cases:

In large companies where vendor network is phenomenal, keep tracking of advances to discharge the GST liability becomes a herculean task which may lead to non-compliance. At present, based on listing of Central Excise or VAT invoices the duty or tax liability is being discharged. Under GST one can’t rely completely on this listing to discharge the liability, the reason being GST would have been paid on receipt of advances which needs to be identified to exclude from the monthly listing of invoices. Failure to keep track of this may lead to double taxation hence one has to be more vigilant. It’s difficult to keep track unless one has got a good IT support.

A customer having credit and advance transactions

There are situations wherein certain products are sold on credit& to others on collection of advances apart from cash. Complying the payment of GST on advance collected would become difficult to identify. Sometimes the customer may ask to adjust the advance collected against outstanding payment. In such a situation the GST which has already been paid on advances has to also to be adjusted against regular supplies. In large companies, it is difficult to have such information to be shared with the taxation department to take care of adjustment in advances. In the absence of which there will be utter confusion.

Linking of advance payments to supplies made:

It may so happen that supplies for receipt of advance payments may be made after a lapse of say four months from the date of receipt of advances. Under matching concept, any discrepancy in taxes would be communicated for corrections through dashboard, it is not clear how this will be taken care.

Cancellation of advances:

It is normal in the business that advance made by the customer may cancel his order for goods. The GST liability would have been discharged on receipt of such advances, for cancellation of the order, the customer will be paid back after retaining of certain sum for the work done. Retention of such sum may change it’s colour from supply of goods to services under GST. There needs to the adjustment in tax treatment. Tracking of all these is more complex which may leads to non-compliance.

Dispute with customer:

Sometimes, in large contracts, there may be dispute with customers from whom advances are received. Such dispute may prolong for more than two years. The GST liability would have been made based on receipt of advances. But complete supply of goods would not have taken place on account of existence of certain dispute. The taxation department may not have the knowledge of the existence of such dispute and if such dispute persists for more than 2 years, GST paid can’t claimed as refund on account of expiry of limitation period to claim refund. It would be very hard to manage such situations.

Turn key project – non-performance clause

In the case of turnkey projects which last for more than two years, lumpsum advances are collected from the customers. The turnkey projects involve both supply of materials and services. The advances received is required to be linked to goods as well as services to discharge the GST liability on advances as certain portion of advance are adjusted against milestone payments. At the end of the project, there may be possibility that certain scope of the contract would not have been performed by the contractor which resulted in reduction of contract value for which payments would have already been made. In case of deficiency in the execution of contract or abnormal delay in completion of the project may lead to claim liquidated damages by the contractee. There is also possibility that the contractor may claim liquidated damages for delay on the part of the contractee to make them available certain facility for executing the contract. In all these cases, the advances already made to the contractor may get adjusted against these damages. Claim of damages are subject to GST as supply of services. The discharge of already paid GST on advances towards goods and subsequent adjustment of advances against services towards liquidated damages and GST on such services will pose a real problem.

If we go on listing such issues, there would be no end to the same. It is difficult to control and monitor timing of supply of goods on advances to discharge tax liability. It does not give the feeling / comfort of certainty in discharging of GST liability and is certainly prone to litigation on account of complications involved. Discharge of tax liability on advances is already prevalent in services at present but it cannot be compared with that of goods. Hence the model GST law requires a re-look into receipt of advances towards supply of goods which mandates discharge of GST liability.

7 Replies to “GST liability on supply of goods on advance”

  1. Chandrashekhar Patil says:

    i have received advance against sale Rs.5000000.00 how calculated GST On advance Received, becauase sale date not known ,means future

    1. Sagar R Joshi says:

      Advance received will be taxable on inclusive basis & tax rate will be the rate of your good or service. Tax liability on advance will arise on the date of receipt of advance.

  2. S Joshi says:

    GST Act should be made changes to Advance paid/received, as here business is effected becos advance tax basis, how much need to be paid whether full tax on total advance received during the tax period say in month or how ? GST council should take note of this, else business is largely affected due to taxing of advance recd against supply. as future date of supply is unknown . ??

    1. S Joshi says:

      This is sure case of double taxing by GST, as most of SME sector doesn’t have trained manpower to do this accounting/to keep track of all Advances received matching supply against each advance received correctly, this will surely have impact on business they should drop this clause !!

  3. shirish shah says:


    1. RECD ADVANCE 1000 on 01/07/2017
    supplied goods on 05/07/2017 worth Rs. 20000
    recd balance payment on 06/07/2017

    show all entries

    2. recd advance 50000 on 01/07/2017
    supplied goods on 05/07/2017 worth rs. 20000
    how to carry forward to next month
    as the other goods will be supplied after 31/07/2017
    or amount to be refunded to customer on 15/08/2017
    show all entries

  4. Srinivas says:

    Greetings Experts!

    What will be status of goods or services or works contracts delivered during Sales Tax /VAT regime and remain pending at the hands of buyer due to prolonged dispute?
    In the above cases what if the sales tax / VAT obligation on such disputed amount is already discharged by the seller to the department but amount remains unpaid ?
    How GST will has to be complied where the question of recovery it self is under question?

  5. Ravi says:

    I have received advance at thje time of service tax let say, 1,00,000 plus service tax. Now it is to be refunded after implementation of GST. What should be the traetment. Please guide.

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