Difference between deposit and advance amount in GST

[Ganeshan Kalyani]

There is a difference between advance money and deposit amount. The advance is received toward goods or services to be supplied in future. The supplier of goods or services use the advance money for the purpose of supply of goods or service. On the other hand deposit money is received only as a security. It is generally not used by the supplier in the course of supply of goods or services. Say, if a godown is given on rent the owner takes six month rent from the lessee as a security so that in case the rent is not received the deposit amount will be adjusted against the due rent. As such the deposit is not a rent. It becomes rent only when it is adjusted against the rent due but not received.

The difference between advance and deposit has been clarified by the Appellate Authority for Advance Ruling, West Bengal in the case of IN RE: M/S. SIEMENS LTD. 2019 (12) TMI 1244 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL vide their Order dated 16.12.2019. The authority ruled that advance and deposits are not the same. An advance does not earn any return on it, whereas a deposit earns 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. GST is not applicable on deposit in view of section 2(31) of GST Act. But GST is certainly applicable on the advance received.

The appellant registered under West Bengal GST Act / Central GST Act had entered into a contract before GST was implemented i.e. before 01.07.2017. The contract was for “design, supply, installation, testing and commissioning” of the power supply and distribution system, third rail system and SCADA system for the entire line and depot of the Kolkata East-West Metro Rail Project (in short ' KMRCL'). The appellant had received ₹ 16,33,33,924/- on 24.06.2011 as mobilization advance. Out of the total lump-sum so received, an amount of ₹ 13,80,74,549/- was stated to be outstanding as on 30.06.2017.

The appellant raises invoice as per milestone completion. The appellant raised invoice in GST i.e. after 01.07.2017. The appellant had a query as regard applicability of GST. Whether the entire invoice value raised in GST should be considered for charging GST or the invoice value to be reduced by the advance money stood balance as on 01.07.2017 and net value should be offered to tax. In order to seek clarify the appellant filed Advance ruling.

The West Bengal Authority for Advance Ruling passed an advance ruling by an order dated 19.08.2019, wherein it pronounced that the outstanding advance money stood credit as on 01.07.2017 in the books of appellant shall be considered as consideration received and GST is leviable thereon.

The Appellant has filed an Appeal against the above Advance Ruling on following grounds:

a)   No tax was leviable on the mobilization advance under the erstwhile Tax regime

b)   The Appellant argued that the applicability of GST in the instant case be governed by the transitional provision u/s 140(10).

c)   WBAAR observed that the mobilization advance is a consideration

d)   The appellant argued that it is only at the time of application of such deposit as consideration, it becomes a consideration towards supply     of service and is subjected to GST accordingly.

e)   The appellant argues that the nature of earnest money deposit has not changed after implementation of GST and it will be covered under  the proviso to section 2(31) of GST Act, which excludes deposits from the definition of consideration unless it is adjusted against supplies. The appellant cited the decisions of the Customs Excise Service Tax Appellate

f)    The appellant says "that the time of supply as per the provision of  section 13 (2) of the GST Act, the applicability of GST on issuance of  invoice or upon payment whichever is earlier, only applies for those  considerations received post introduction of GST."

The appellant argued that the mobilization advance received by them from KMRCL was in the form of deposit and it becomes a consideration only at the time of application of such deposit towards supply.

The appellants relied upon the decisions of the Tribunal in the case of Thermax Instrumentation Ltd. Vs. Commissioner of C. Ex., Pune-I  = 2015 (12) TMI 1222 - CESTAT MUMBAI and GB Engineering Enterprises Pvt. Ltd. Vs. C.C.E., Tiruchirapalli  2017 (1) TMI 1674 - CESTAT CHENNAI, wherein the Ld. CESTAT had observed that the mobilization advance is like earnest money and argued that this nature has not changed after implementation of GST and hence it will be covered under the express proviso to section 2 (31) of the GST Act which excludes deposits from the definition of consideration unless it is adjusted against supplies.

Appellate Authority's observation: The observations of the Ld. Tribunals in the aforementioned cases which is relied upon by the appellant were clearly within the ambit of the legal provisions of Service Tax which was prevalent, when the decisions were proclaimed. In the present case, the question relates to whether the unadjusted part of the advance received by the appellant can be considered for taxation under the GST Act on 01.07.2017 itself. Hence, even by the wildest imagination also, the observations made by Tribunals in the pre-GST regime cannot be made applicable in this case.

Moreover, in the transitional provisions of the GST Act, no such provision has been included whereby, the advance outstanding as on 01.07.2017 can be allowed to be subjected to GST only as and when the bills are raised against supply of goods and services. Hence, the decisions on which the Appellants arguments were relied upon do not squarely apply in the present case.

After introduction of GST Act, that is with effect from the 1st day of July, 2017, the erstwhile Finance Act, 1994 and the notifications issued there under ceased to exist. In the instant matter the only applicable law is the GST Act, 2017. Accordingly, the time of supply of services is to be guided by section 13(2) of the GST Act. Hence, the remaining unadjusted amount of ₹ 13,80.74,549/- as on 01.07.2017 has to be construed as if it was credited into the account of the appellant on the date of 01.07.2017 only, which will attract GST on such amount on that date itself. Hence, we find no force in the argument of the appellant that section 13 (2) of the GST Act, 2017 will not be applicable in the instant case.

In respect of the goods and services provided by the appellant to KMRCL post introduction of GST, the amount of ₹ 13,80,74,549/- can only be considered as advance paid as on 01.07.2017, and in the absence of any exemption of mobilization advance from tax under GST regime, the entire amount of ₹ 13,80,74,549/- becomes taxable on the said date.

Author's view:  The Appellate Authority for West Bengal has clarified the difference between advance amount and deposit money. It also clarified that w.e.f. 01.07.2017, all old Indirect tax law becomes inactive and only GST law is applicable. And as per S.13(2) only advance is exempted to GST. In the present case, mobilization of advance is as good as an advance amount and therefore is subject to GST.

Discussions to this article

[KASTURI SETHI]

Dear Sir,

Beautifully explained the difference between the the terms,'Deposit' and 'Advance' with legal force.

[Ganeshan Kalyani]

Thank you so much for your kind words. It is a consideration for my efforts. It is an encouragement to write more. Thanks a ton Sir.

[KASTURI SETHI]

Dear Sir, Also write on difference between "Reimbursement and Disbursement ".

[V. Lakshmikumaran]

In my view, the observation of the Hon'ble WBAAAR is not in conformity with legal provisions. How can mobilization amount be construed as advance vis-a-vis deposit. the very base of this judgment, in my view is incorrect, client should challenge the same before the HC.