Advance adjustment for Non provision of service

Dear Mitesh

Your case has been clarified in Circular No. 137/07/2020-GST dated 13th April, 2020. Refer Sl.2 in the table under Item 2, which reads as follows:

Issue: 

An advance is received by a supplier for a Service contract which got cancelled subsequently. The supplier has issued receipt voucher and paid the GST on such advance received. Whether he can claim refund of tax paid on advance or he is required to adjust his tax liability in his returns?

Clarification: 

In case GST is paid by the supplier on advances received for an event which got cancelled subsequently and for which no invoice has been issued in terms of section 31 (2) of the CGST Act, he is required to issue a “refund voucher” in terms of section 31 (3) (e) of the CGST Act read with rule 51 of the CGST Rules.

The taxpayer can apply for refund of GST paid on such advances by filing FORM GST RFD-01 under the category “Refund of excess payment of tax”.

Further,

As per Section 31(3)(e) -  "on receipt of advance payment with respect to any supply of goods or services or both the registered person issues a receipt voucher, but subsequently no supply is made and no tax invoice is issued in pursuance thereof, the said registered person may issue to the person who had made the payment, a refund voucher against such payment;"

As per Section 54(1), a person can claim refund of tax paid by making an application in the prescribed form. Following principle of Unjust Enrichment, Section 54(5) directs the proper officer to credit the refund amount to Consumer Welfare Fund mentioned in Section 57. However, as per Section 54(8)(c) refund of tax paid on a supply which is not provided, either wholly or partially, and for which invoice has not been issued, or where a refund voucher has been issued, can be made directly to the applicant instead of crediting to the Consumer Welfare Fund.

Thus in short, you can apply for refund for the tax paid on such advances, provided you have issued a refund voucher.

Note that in this case Credit Note cannot be issued because as per Sec.34(1), credit note can be issued only if a tax invoice was originally issued. That is, credit note always follows a tax invoice. In your case, tax invoice has not been issued.

Regards

Ajay