In the automobile and consumer goods sector, it is common for dealers to collect advance booking amounts from customers. A frequent practical issue arises when the customer does not complete the transaction and fails to claim a refund. The dealer then forfeits the advance and adjusts it in the books. A critical legal question follows: Does such forfeiture of booking advance attract liability under the Goods and Services Tax (GST) regime?
This article addresses this issue through the lens of statutory provisions, CBIC’s official clarification, and legally defensible compliance planning.
Legal Framework: Advance Receipt in Supply of Goods
Under Section 12(2)(a) of the Central Goods and Services Tax Act, 2017, the time of supply of goods is the earlier of:
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The date of invoice, or
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The date of delivery.
However, the first proviso to this section explicitly excludes receipt of advance for goods from being treated as the time of supply.
Additionally, Rule 50 of the CGST Rules, 2017 requires the issue of a receipt voucher for advances received but does not create a tax liability merely on such receipt.
Legal interpretation:
Where a dealer receives a booking advance (e.g., ₹10,000) and neither issues an invoice nor delivers the goods, GST is not payable at that stage.
If Sale Does Not Materialise – Is Forfeiture a Taxable 'Supply'?
The next question is whether forfeiting the advance amount constitutes a supply of service under GST.
Section 7(1)(a) of the CGST Act defines “supply” to include:
“All forms of supply of goods or services… for a consideration in the course or furtherance of business.”
Further, Schedule II, Entry 5(e) deems the following as a supply of service:
“Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.”
Thus, if the forfeiture is construed as consideration for tolerating the customer's default, it could be classified as a deemed supply of service, triggering GST.
CBIC Circular No. 178/10/2022-GST dated 3 August 2022 – Clarification on Forfeiture
The CBIC, through this circular, clarified that:
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Forfeited advances may be treated as consideration for a taxable supply under Entry 5(e) only where:
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There is a binding contract or booking form;
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The forfeiture clause is expressly agreed as a condition;
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The dealer is contractually obliged to tolerate cancellation or default by the buyer.
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Interpretation:
Only when forfeiture is a pre-agreed contractual consequence of non-performance can it be considered a taxable supply of service under GST.
Scenario-Based Legal Position
| Situation | Contractual Position | GST Liability |
|---|---|---|
| No invoice issued, no delivery, and no forfeiture clause | No enforceable obligation; unilateral forfeiture | No GST payable |
| Booking form or contract contains forfeiture clause | Forfeiture becomes contractual consideration for tolerating non-performance | GST payable under Entry 5(e) |
| Voluntary adjustment without buyer's consent or documentation | No mutuality or legal basis for tolerance | Generally not taxable, but prone to dispute |
Practical Compliance Strategy and Tax Planning
To mitigate GST exposure on forfeited advances:
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Include forfeiture clauses in booking forms stating clearly that the advance is non-refundable upon cancellation or no-show.
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Ensure the customer signs or accepts the terms explicitly to evidence mutual consent.
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Do not raise invoices unless actual delivery is made or the supply is executed.
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In cases where forfeiture is taxable, issue a tax invoice and discharge GST liability under the appropriate SAC (Service Accounting Code).
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