GST impact: Tax on advances gives India Inc the jitters

Cost of a transaction is likely to increase under the new tax regime, say experts

Tax on advances made in course of a business transaction– both for goods and services– and the subsequent compliance requirements under the goods and services tax (GST) regime are giving Corporate India the heebie-jeebies.

Tax experts feel the move to tax advances is likely to increase cost of a transaction under the new indirect tax regime and could trigger a change in the way companies do business. Some businesses may even resort to a change in nomenclature of an ‘advance’ to ‘security deposit’ to avoid paying the tax, fear experts.

“It seems the GST regime discourages the practice of giving advances,” says Harpreet Singh, partner–indirect tax, KPMG India. Tax on advances made is a key departure from the current tax regime. The receiver of an advance would be liable to pay GST, treating the advance as inclusive of the tax, points out Bipin Sapra, tax partner, EY.

As part of compliance, the receiver is required to issue a receipt voucher, equivalent to the value of the advance. Accordingly, this would need to be disclosed in the GST network (GSTN). In case the supply is not made for which the advances were received, a refund voucher has to be issued. This too has to be reported in the GSTN.

Singh points out that it is important to determine the full value of the taxable supply to which the advance pertains. “Otherwise, the correct tax may not be paid at the time of advance, leading to interest liability and penal consequences,” he says.

Interestingly, receipt of a security deposit is not treated as a consideration for provision of any supply and accordingly does not attract GST.

“It is critical that security deposits should not be mixed with advances, as only advances against a taxable supply are liable to GST and not security deposits,” says Singh.

Tax experts anticipate that treatment of advances and the compliance requirements under GST regime may discourage businesses to follow the practice of giving advances.   

“There are substantial compliances involved for advances. Further, the recipient of the supply cannot take credit of the tax paid to the supplier based on the advance receipt voucher. It can be done only on the basis of invoice,” says Sapra.

Singh’s advice to businesses which have to deal with advances is to put an automatic trigger point in the enterprise resource planning system to highlight that the tax liability is due immediately on receipt of advance, even if the supply has not taken place.