1. Background: Normally, mobilization advance payment is made to a contractor for initial expenditure in respect of site mobilization, laborers, and other initial expenses. Mobilization advance is linked to the contract price in percentage terms, as decided mutually by the contracting parties. The amount of mobilization advance is adjusted against the invoices, raised by a contractor from time to time.
2. First Issue: In this article, we discuss the issue as to whether a supplying contractor is liable to pay GST on receipt of mobilization advance.
3. Second issue discussed is as to when does he become liable to pay GST i.e. whether at the time when such mobilization advance is received or at the time when such mobilization advance is adjusted against the running bills, raised by him.
“Consideration”, “Deposit” & “Advance”:
“Consideration” GST is levied on supplies of goods or services or both [sec. 9 of CGST Act]. The expression, “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business [sec. 7(1)(a) of CGST Act]. It may be noticed that even if goods/services are not provided, but are agreed to be provided for a consideration, such a transaction would qualify as a “supply”. All payments received by a supplier cannot be treated as a “consideration” but payment can be treated as a “consideration” only if it is: ü in respect of the supply, or ü in response to the supply, or ü for inducement of the supply. A supplier may receive payments at different stages i.e. he may receive payment, at the time of provision of goods/services or after he has provided goods/services or he may even receive payment before he provides goods/services. Such payment could be either a “deposit” or an “advance”.
“Deposit” & “advance” The terms, “deposit” and “advance” have not been defined in the GST Act. The term, “advance” would also include payments in the nature of “mobilization advance”.
4. When GST is leviable & payable (time of supply): Incidence of taxation for GST is “supply” of goods or services or both. But, GST Law also contains provisions to determine when GST should be paid, i.e. time of supply, which is slightly different in case of a supply of goods and supply of services. Liability to pay tax on services arises, as determined u/s 13.
4.1 Time of supply for services: Liability to pay tax on services arises [CGST sec. 13(2)] on the earliest of the following dates: (a) date of issue of invoice by the supplier, if the invoice is issued within the period prescribed u/s 31(2) or date of receipt of payment, whichever is earlier; or (b) date of provision of service if the invoice is not issued within the period prescribed u/s 31(2) or date of receipt of payment, whichever is earlier; or (c) the date on which recipient shows receipt of services in his books of account, in a case where provisions of sec. 13(2)(a) or sec. 13(2) (b) do not apply. Thus, there should be absolutely no doubt that if a supplier of services receives payment, then he could be liable to pay GST even if he has not raised an invoice or has raised an invoice after the receipt of payment. In sec. 13(2) i.e. time of supply for services, the expression, “with respect to the supply” is absent.
4.2 Time of supply on receipt of “Deposit” & “advance”: The terms, “deposit” and “advance” have not been defined in the GST Act. However, there are certain distinguishable features of “advance” and “deposit”. For instance, an “advance” does not earn any return on it, whereas a “deposit” may earn interest. An “advance” has to be utilized for the specific purpose for which the “advance” is made, whereas utilization of a “deposit” depends entirely on the person with whom it is deposited. 4.2.1“Advance”: The term, “advance” itself suggests that such amount is a partial payment out of the total “consideration” to be paid to a supplier. Such amount of advance has a direct nexus with the supply to be made subsequently and the event of supply is absolutely certain. Thus, receipt of an amount by way of an advance could be considered to be “for the inducement of a supply”. Therefore, normally, there may not be any occasion for the return back of an amount of advance. The term, “advance” would include “mobilization advance” also.
4.2.2-“Deposit”: “Deposit” is not paid by a recipient “for the inducement of a supply” but it acts as a guarantee by the recipient. Secondly, “deposit” can be refundable, non-refundable, or adjustable.
4.2.3-Liability to pay tax on “deposit” & “advance”: Receipt of an amount by way of “deposit” is considered as a receipt of payment, only when such deposit is applied as a consideration for the supply [CGST sec. 2(31) proviso]. Thus, in other words, receipt of an amount by way of deposit cannot be considered as a receipt of payment until such amount is applied as consideration for the supply and not before that. Consequentially, the time of supply would also get deferred. The proviso to definition of “consideration” [CGST sec. 2(31) proviso] reads thus: “Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.
4.2.4 Other provisions, relating to advance: Invoice for advance received: A registered person must issue a receipt voucher on receipt of advance. [CGST sec. 31 (3)(d) r/w rule 50] . On the other hand, on receipt of an amount by way of deposit, such a receipt voucher would not be necessary. Return in GSTR-1 [Table 11] also contains fields for entering details of advance received. ii. Supply not made, after receipt of advance: In case, supply is not made after receiving an advance, a refund voucher has to be issued by registered person to the person, who had paid advance amount. [CGST sec. 31(3)(e)]. A refund of tax paid on a supply which is not provided, either wholly or partially, can also be claimed. [CGST sec. 54(8)(c)]
4. Conclusions, so far: From the above discussion, following conclusions can be drawn, as regards, “advance” and “deposit”: In case an amount is received by way of an advance, GST becomes payable on such advance payment on the date of receipt of such advance. In case an amount is received by way of a “deposit”, then GST becomes payable only when such amount is applied as a consideration for the said supply.