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Goods and Services Tax Act, 2017 (GST) has brought the concept of "One Nation, One Tax", and has simplified the method of collecting and calculating Indirect taxes all over India. There is no cascading effect and ambiguities while dealing with provisions of the GST Act, 2017.

We know that for Sale Goods or Supply of Services, the most important concept is the "Consideration", and Section 2(31) of CGST Act, 2017 defines it’s as

"2(31) Consideration in relation to Supply of Goods and Services includes-

  1. Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by The Central Government or State Government;
  1. The monetary value of any act or forbearance, whether or not voluntary, in respect of, or in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy received from the Central or State Government.

Provided that Deposit given in respect of goods or services or both shall not be considered as payment made for such supply unless the supplier applies the deposit as consideration for the same supply.

LET'S ANALYSE ABOVE DEFINITION

From the above definition, we find that;

  1. There should be a direct nexus between supply and consideration. In many cases, Courts have said that Consideration" should be towards an identifiable activity."
  2. Consideration can be in form of money or money’s worth -it means that payment in kind, like providing goods and services qua, a specific supply would also be covered under the ambit of term consideration.
  3. Deposits made by a person will be considered as supply only when the person applies it towards the supply of goods or services.
Impact of GST on Advances / Security Deposits / Retention Money etc.

LET'S CONSIDER DIFFERENCE BETWEEN DEPOSIT AND ADVANCE

Deposit

Advance

A sum of money paid by the contractor to the developer, and which is utilized by the developer on the occurrence of a contingent event.

A sum of money payable by the service recipient (developer) to the service provider(contractor), at the initiation of the contract and the same advance, shall be adjusted against consideration on the supply of goods or services.

In case a contingent event does not happen, the deposit shall be refunded to the contractor.

It does not refundable.

It is generally refundable and is adjusted only on the occurrence of a contingent event.

An advance is never refundable, instead, it is necessarily adjusted against the subsequent payments to be made by the service recipient.

Deposit, will not qualify as a consideration until the happening of some contingent event after which it shall be adjusted as consideration.

The advance will always qualify as consideration and shall be adjusted against the supply of goods or services.

 

TREATMENT OF MOBILIZATION ADVANCE UNDER GST;

We know that a Contractor generally receives Mobilisation Advance, from customer to start work. The same shall be adjusted against the bills raised by the contractor.

In this case, the Contractor is obliged to discharge GST liability on Mobilization Advances, when it receives it or at the time of raising of an invoice for such Mobilization Advance, whichever is earlier.

The recipient of services (developer) will be entitled to claim ITC, only when that mobilization advance is adjusted against bills raised by the Contractor.

TREATMENT OF MATERIAL ADVANCES

When an agreement contemplates payment of material advances i.e. an advance amount towards the supply of goods is required to be paid, the liveability of GST will be governed by the date of transfer of title of goods.

Note that when advance has been paid before GST and supply has been made after 1st July then the contractor will be required to fulfill GST liabilities.

In the form above it is clear that the liability of GST will be discharged by the contractor at the time of transfer of title of goods.

TREATMENT OF RETENTION MONEY

Generally, in the majority of contracts, the customers retain a part of the invoice amount, the said amount is paid, post the completion of the tenure of the contract.

Section 13 of CGST Act, 2017 provides that works contractors would be required to deposit the tax on the entire invoice amount, irrespective of the fact that only part of the invoice amount has been paid by the recipient.

It may be noted that the recipient would not be allowed to take the ITC of the tax (and would need to reserve proportionate credit to the extent of non-payment plus interest), proportionate to the amount of consideration not paid, the recipient will be able to claim ITC only on payment of consideration.

 

TREATMENT OF SECURITY DEPOSIT

Security Deposit is also be treated as Deposit; we have discussed earlier. A contractor may provide Security Deposit in various forms, such as Bank Guarantee, EMD, FD, etc. and the same shall be refunded on completion of the contract.

A contractor is liable to discharge GST liability of Security Deposit only when same has been adjusted on happening of a contingent event as defined on the Agreement.

SUMMARY

Nature of Payment

Time of Supply

Security Deposit

It is generally paid by the contractor to the developer as a safeguard against some contingent event (such as non-completion of contract, faulty work, non-performance of contract) and the same shall be refunded if the said contingent event does not happen and hence dose not considered as a part of "Consideration".

If the same will be adjusted as a consideration on the happening of a specified contingent event, then the supplier has to discharge GST liability in said amount.

Mobilization Advance

The contractor is liable to discharge its GST liability at the time when it receives the mobilization advance or the date on which the invoice for such advance is raised whichever is earlier.

Retention Money

The contractor would be required to deposit the tax on the entire invoice amount, irrespective of the fact that only part of the invoice amount has been paid by the recipient.

Material Advances

When the contractor received an advance towards the supply of goods or materials the liveability of GST will be governed by the date of transfer of title of goods.

Disclaimer: 

The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Some judgments of counts have been taken as it is available. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, the author assumes no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take the appropriate advice from consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. The author assumes no responsibility for the consequences of the use of such information.


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Category GST, Other Articles by - CS Deepak Pratap Singh 



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