Introduction: In the dynamic landscape of business transactions, managing advances and goods sent on approval requires precise adherence to GST regulations. This guide provides an in-depth analysis of the GST treatment for these transactions, incorporating updates for the financial year 2024-25. It includes detailed explanations on tax planning, accounting entries, and reporting to ensure compliance and optimal fund management.
GST on Advances Received: Detailed Treatment
1. Advances in Business Transactions: Advances refer to payments received before the actual delivery of goods or services. The treatment of these advances under GST is dictated by the time of supply rules as per Sections 12 to 14 of the CGST Act, 2017.
2. Time of Supply Rules:
- Goods: Tax on advances for goods is not required at the time of receiving the advance. The tax is levied based on the time of supply when the goods are actually supplied.
- Services: GST is applicable on advances received for services at the time of receipt, irrespective of when the service is provided.
GST Treatment for Advances
3. Advances for Goods:
As per CGST Notification No. 66/2017 (effective from 15th November 2017), advances received for goods are not subject to GST. The tax liability arises when the actual supply of goods occurs.
Time of Supply for Goods:
- The earliest of the following:
- Date of issue of the invoice or the last date by which the invoice should be issued.
- Date of payment.
- The earliest of the following:
Example: Ms. Y pays a 50% advance of Rs. 15,000 on 15th May 2024 for goods from ABC Ltd. The goods are supplied on 1st June 2024, and the final invoice of Rs. 30,000 is issued on 25th June 2024. GST is applicable on the full amount of Rs. 30,000 as of 25th June 2024, the date of invoice.
4. Advances for Services:
Advances received for services are subject to GST at the time of receipt of the advance.
Time of Supply for Services:
- The earliest of:
- Date of issue of the invoice (if issued within the prescribed time).
- Date of provision of the service (if the invoice is not issued within the prescribed time).
- Date of receipt of payment/advance.
- Date on which the recipient records the receipt of services in their books of accounts.
- The earliest of:
Example: Mr. A pays a 25% advance of Rs. 50,000 on 20th September 2024 to CashFlow Ltd. for consultancy services. The services are provided on 1st October 2024, with a final invoice of Rs. 2,00,000 issued on 20th October 2024. GST is applicable on the advance of Rs. 50,000 as of 20th September 2024.
Handling Goods Sent on Approval
5. Goods Sent on Approval: Goods sent on approval involve sending goods to a buyer who will make payment only upon acceptance of the goods. The GST treatment for such transactions requires careful consideration.
Time of Supply:
- For goods sent on approval, the time of supply is determined by the date of acceptance of the goods or the expiry of the approval period.
GST Treatment:
- When Goods Are Accepted: GST is applicable when the buyer accepts the goods. The supplier must issue an invoice and charge GST at the time of acceptance.
- When Goods Are Returned: If the buyer returns the goods before acceptance, GST does not apply. Proper documentation of the return must be maintained.
Example: ABC Ltd. sends goods worth Rs. 50,000 to Ms. Y on an approval basis on 1st June 2024. Ms. Y accepts the goods on 15th June 2024. ABC Ltd. must issue an invoice on 15th June 2024 and charge GST on Rs. 50,000. If Ms. Y returns the goods before acceptance, no GST is charged, and appropriate documentation should be retained.
Tax Planning Tips
6. Efficient Tax Planning:
For Goods:
- Since GST on advances for goods is not applicable, manage cash flows by issuing final invoices and discharging tax liability when the goods are supplied.
- Monitor the timing of invoice issuance and the actual supply to ensure accurate tax reporting.
For Services:
- GST on advances for services should be paid at the time of receiving the advance. Plan advance receipts to optimize cash flows and manage tax liabilities effectively.
- Ensure timely issuance of invoices to align with the time of supply rules.
7. Claiming Input Tax Credit (ITC):
For Goods: ITC on advances is not applicable. Claim ITC only when the goods are actually supplied. Ensure proper documentation and record-keeping to claim ITC accurately.
For Services: ITC on advances is not available until services are received. Claim ITC after service delivery, ensuring all relevant documents are in place.
Accounting Entries for Advances and Goods on Approval
8. Accounting Entries:
For Goods:
At the Time of Receiving Advance:
- Debit: Bank/Cash Account
- Credit: Advance Received Account (Liability)
At the Time of Supply (Issuing Invoice):
- Debit: Advance Received Account (Liability)
- Credit: Sales Account
- Credit: GST Output Tax Account
For Goods on Approval:
- When Goods Are Sent: No immediate accounting entry for GST. Record the goods sent on approval in inventory.
- When Goods Are Accepted:
- Debit: Accounts Receivable
- Credit: Sales Account
- Credit: GST Output Tax Account
- If Goods Are Returned: Adjust inventory and remove the entry from Accounts Receivable. Ensure proper documentation and update accounts accordingly.
For Services:
At the Time of Receiving Advance:
- Debit: Bank/Cash Account
- Credit: Advance Received Account (Liability)
- Debit: GST Output Tax Account (for the advance)
At the Time of Providing Service (Issuing Final Invoice):
- Debit: Advance Received Account (Liability)
- Credit: Service Revenue Account
- Credit: GST Output Tax Account (if any adjustment is needed)
Reporting in GST Returns
9. Reporting in GSTR-1:
Table 11A: Report advances received for which invoices have not been issued. Provide a cumulative figure.
Table 11B: Adjust advances reported in previous periods against invoices issued in the current period.
Goods on Approval: No specific reporting is required until the goods are accepted. Ensure accurate documentation for proper reporting when the invoice is issued.
Note: Segregate advances into interstate and intrastate categories. Report the gross figure of advances received and the corresponding tax (CGST, SGST, or IGST) accurately to reflect in the tax liability.
Conclusion
Effective management of advances, goods sent on approval, and adherence to GST regulations is crucial for compliance and financial efficiency. By understanding the treatment of these transactions, implementing strategic tax planning, maintaining precise accounting entries, and ensuring accurate reporting in GST returns, businesses can navigate GST requirements effectively and optimize their financial operations.
Key Points to Remember:
- Goods: GST is applied at the time of supply, not on advances.
- Services: GST is applied on advances at the time of receipt.
- Goods on Approval: GST is applicable when goods are accepted. Ensure proper documentation for returns.
- Tax Planning: Strategically manage advances and invoice timings to optimize cash flow and tax liabilities.
- Accounting and Reporting: Maintain accurate records, adjust previous advances, and ensure proper reporting in GST returns to avoid defaults and ensure compliance
