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Published on:

April 9, 2025

Viraaj Vashishth

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GST Applicability on Mobilization Advance

Mobilization advance, which is highly popular among sectors like construction and infrastructure, is the advance amount received from clients by contractors at the beginning of the work. This advance may be used for the procurement of materials, deployment of labour, and establishment of the necessary infrastructure. With the implementation of Goods and Services Tax (GST) in India, the mobilization advance has attracted much importance due to the tax treatment with regard to it.

Numerous advances in mobilization form a bridge that is provided to contractors to begin work while knowing that they will be paid in due time and able to make provisions for the purchases of materials, deployment of labour, and establishment of the infrastructure needed for required buildout. Most common in construction and infrastructure, this advance takes an upfront payment from the clients to get mobilization activity started.

This article studies the application of GST on mobilization advance in-depth concerning the various provisions of law, compliance requirements associated with them, and several practical difficulties faced by businesses.

Understanding Mobilization Advance

The mobilization advance represents the first step of finance given by the client to the contractor to allow him to begin work without the need for immediate funding. Normally, this advance would be a percentage of the whole contract value and would then be deducted from future payments against running bills as the job progressed. In the case of Engineering, Procurement, and Construction (EPC) contracts, it is common practice for the clients to give mobilization advances so that contractors can secure funds for commencing critical activities related to the project. This is a common practice, especially for large projects that require great investments at the outset.

GST Applicability on Mobilization Advance

On all payments made in advance for goods or services under the Central Goods and Services Tax (CGST) Act of 2017, GST is livable. According to Section 13 of the CGST Act, the time of supply for services is determined to be either the date of raising the invoice or the date of receipt of payment, whichever is earlier. Thus, in those cases where a contractor receives a mobilization advance, GST becomes payable simultaneously with receipt, though the actual supply of services might take place later. This clause ensures the timely charging of tax on advances in accordance with the objective of the entire GST framework to collect and pay tax on an advancing basis.

Time of Supply and Taxation Rules

The 'time of supply' is important in dealing with when GST liability comes into play. When it comes to services, the time of supply is something that will happen earlier between the following two occurrences:

1. The date of issue of the invoice by the supplier, if the invoice is issued within the prescribed period.

2. The date of receipt of payment.

Mobilization advances are actually concerned with the situation in which payment has been made before the invoice is issued; it means that GST will be payable at the time of receipt of advance. Therefore, the GST should be computed by the contractors as soon as the mentioned advances have been received so that there is a smooth flow of tax compliance.

GST Rate and Compliance Aspects

The GST rate applicable on mobilization advance is dependent on the nature of contract. For a work contract, which is treated as supply of services under GST, the standard rate is 18%. A contractor should issue a receipt voucher for the advance received as per the provision under Section 31(3)(d) of CGST Act. This voucher of receipt works as evidence of the transaction and is very much needed for audit and compliance purposes.

The same shall reflect in the monthly GST returns against the advance and the respective GST paid in the prescribed forms GSTR-1 and GSTR-3B. This is done for proper documentation regarding tax liabilities. However, concerning Input Tax Credit (ITC), the contractor can take credit on that GST paid for inputs and input services consumed while executing the contract, as per the conditions provided under Section 16 of CGST Act.

Legal Provisions and Judicial Interpretations

Taxability of mobilization advances has been suffused within various judicial pronouncements under GST. A very important ruling amongst them is the ruling by the Tamil Nadu Authority for Advance Ruling (TNAAR) in the case of Shapoorji Pallonji & Company Private Limited. In this case, the applicant had got mobilization advances enrolled before the introduction of GST and had paid service tax on the amounts.

According to the TNAAR, there is no liability for GST on the mobilization advances received prior to July 1, 2017, to the extent that service tax has already been paid under the former tax regime. This was grounded on Section 142(11)(b) of the CGST Act, whose intention was to preclude double taxation on the same transaction during the transition to GST.

On the contrary, mobilization advances received after the implementation of the GST will be chargeable to the GST when received. This distinction illustrates that the taxability of advances is dependent on the time of receipt of advance.

Also Read About: Applicability of GST for the Co-operative Sector in India

Challenges and Industry Perspectives

1. Cash Flow Impact - The immediate GST liability on receiving advances may put pressure-even more on cash flows of contractors particularly those working on very thin margins.

2. Countless accounting challenges - The recording of advances and issue of relevant receipts and rendering services will all go according to the time he handles them concerning the monthly GST return preparation. It means strong systems and processes for all accounting services offered.

3. Contract Terms - It must clearly point out the advance and tax terms, and the understanding of both parties who may or may not turn to an argument.

They require proactive financial planning and definite contracts as well containing the precise treatment of mobilization advances and roles with tax responsibility.

Conclusion

Such an indispensable factor to be considered about GST fallout on mobilization advances pertains to contractors or clients involved in the construction and infrastructure businesses. It is pertinent for one to know the provisions of the law that governs compliance and any potentiality for challenges as far as managing well and complying with tax laws. To navigate this concept effectively, stakeholders must:

1. Review Contractual Terms - Ensure that contracts very much address the treatment of mobilization advances as well as the assumption of responsibilities of GST.

2. Good Record Keeping - Well-placed accounting practices leading to advances received, GST paid, and the adjustments as they occur in subsequent bills.

3. Professional Advice - It is important to adopt tax professional consultation regarding all legal interpretations and compliance with dynamic tax laws.

Through these measures, businesses can successfully manage the GST obligations associated with mobilization advances.

FAQs

1. What is GST Applicable on Mobilization Advance?

GST is applicable on a mobilization advance at the time of receipt, as an advance payment for service under GST law.

2. Is GST charged on Mobilization Advance even before issuing an invoice?

Yes, GST on mobilization advance is payable at the time of receipt, although invoice may be issued later, as per the provisions under Section 13 of CGST Act.

3. What is the GST Rate applicable on Mobilization Advance?

Generally speaking, 18% GST is charged on mobilization advance as works contracts come under the category of services in GST.

4. Can GST paid on an advance for mobilization be set off later?

Yes, GST in advance will be set off against further tax liabilities when invoices are issued.

5. In what manner should contractors report GST on Mobilization Advance in returns?

Contractors should report the GST on the advance received in GSTR-1 and GSTR-3B towards compliance with tax provisions.

6. Is there any exemption on GST on Mobilization Advance?

There is no blanket exemption, however in case service tax was paid already on the advances before GST came into place, double taxation may be avoided.

7. What will be the impact if a mobilization advance is refunded?

If a mobilization advance is refunded prior to the rendering of the service, then the GST paid thereon will be adjusted in the next tax period.

8. Can ITC be claimed on GST paid for Mobilization Advance?

Yes, ITC can be claimed on the GST so paid subject to the requirement under Section 16 of the CGST Act.

9. Is GST on advance receipt relevant for all contracts?

Yes, GST on advances is relevant for most service contracts such as construction and infrastructure projects.

10. How will GST on Mobilization Advance affect cash flow for contractors?

This means that GST is paid at the time of receipt. Thus, contractors will need to ensure that cash flow is managed effectively so that liquidity issues do not arise.