Customer Cancelled After Paying an Advance: GST on Advances, Refunds and Credit Notes
GST is due on advances for services but generally not on advances for goods. If an order is cancelled before supply, issue a refund voucher and report it so the tax paid is reduced; if an invoice was issued, use a credit note. A cancellation fee you keep under the contract usually attracts GST.
A customer pays a 30% advance, then cancels. You refund part of it and keep the rest as a cancellation charge. Three GST questions follow: was tax due on the advance, how do you get it back, and is the amount you kept taxable?
Was GST due on the advance?
| Advance for | GST on the advance? |
|---|---|
| Goods (regular taxpayers) | No. Notification 66/2017-Central Tax exempts advances for goods. Tax is due when you issue the invoice |
| Services | Yes. Tax is due when you receive the advance, at the rate for that service |
| Goods, for composition taxpayers | Follows the composition rules; check with your CA |
The documents
- Receipt voucher when you receive an advance for services, showing the amount and tax.
- Refund voucher if the order is cancelled and you return the advance before any supply or invoice.
- Tax invoice when the supply is made, adjusting the advance already taxed.
- Credit note if the invoice was already issued and the order is then cancelled in full or part.
Reporting in GSTR-1
- ✓Advances received for services, with no invoice in the same month, go in the advances table (Table 11A).
- ✓When the advance is adjusted against an invoice, or refunded with a refund voucher, report the adjustment in Table 11B so the tax is not paid twice.
Cancellation charges
If you keep part of the advance, look at what it is for:
- ✓A fee written into the contract for cancelling is generally treated as consideration for a service and attracts GST, commonly at 18%.
- ✓Compensation for a breach is not always a supply. CBIC Circular 178/10/2022 explains when such payments are and are not taxable.
The wording of your booking terms decides which applies, so write cancellation terms with GST in mind.
A worked example
A Kochi event management firm receives ₹1,18,000 (₹1,00,000 plus 18% GST) as an advance for a corporate event. It issues a receipt voucher and pays ₹18,000 GST. The client cancels. Under the contract, the firm keeps ₹20,000 as a cancellation fee and refunds the rest.
- ✓It issues a refund voucher for ₹80,000 plus ₹14,400 GST, and reports it in Table 11B to reduce the tax already paid.
- ✓It issues a tax invoice for the ₹20,000 cancellation fee plus ₹3,600 GST.
- ✓The client receives ₹94,400 back.
The income-tax side
An advance is a liability until the goods or services are delivered. It is not income on receipt. A cancellation fee you keep is income in the year the cancellation happens.
Frequently asked questions
We sell goods and took an advance. Do we issue a receipt voucher?
A receipt voucher is still a good record, but no GST is payable on it if you are a regular taxpayer.
Can we refund the advance by adjusting the next order?
Yes, if the customer agrees. Record it as an advance carried forward, and adjust it against the next invoice.
What if the refund happens in a later financial year?
Report the refund voucher in the month you issue it. If the tax was paid in an earlier year, speak to your CA about the right adjustment.
Sources
- ✓GST on advances received for future supplies, GST Council e-flier
- ✓Notification 66/2017-Central Tax: no GST on advances for goods, GST Council
- ✓Refund voucher under GST, MyGSTRefund
This is a summary, not legal advice. Confirm with your chartered accountant before you rely on it.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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