GST Treatment on Retention Money

In Normal trade , company doing works contact for them retention money concept used. Most of time after completion of project customer retain a part of invoice amount. This amount is paid after completion of contract or as per terms and conditions. Hence its important to understand GST Treatment on Retention money. As per Section 13 of CGST Act works contractor need to be pay gst on entire amount. So Even where contract is not getting Retention amount he need to pay GST on Retention money.

For Example : M/s ABC Ltd doing Glass repairs work for M/s ANB Ltd at Rs. 50 lac Plus Applicable GST. There of agreement tis that M/s ANB Ltd will hold 10 % as retention money for 1 year after completion on contact.

GST Return Filing Works Contact

GST Treatment on Retention Money Supplier ( M/s ABC Ltd )

• Issue invoice of Rs. 50 lac Plus GST to customer
• Pay GST on Full amount of invoice ( GST on 50 Lac )
• File GSTR 1
• File GSTR 3 B

GST Treatment on Retention Money Customer ( M/s ABN Ltd )

• Avail GST Credit as per section 16 of CGST Act
• If retention money of 10% is not paid with in 180 days then proportionate reversal of GST Credit
• Avail balance GST Credit after payment of retention money

GST Credit on Retention Money Under GST

As per Section 13 of CGST Act , works contractor need to pay GST on full invoice amount. In such situation he faces cash flow issues do be holding of retention money by client. GST Credit on retention money is not allowed funds not paid to vendor within 180 Days. Hence Customer need to leave proportionate GST Credit or if availed then reverse credit proportionate amount not paid. GST credit on retention money is allowed subject to conditions.

GST Credit Disallowed on Retention Money Not Paid in 180 Days

GST Credit is disallowed on if client fail to make payment to vendor within 180 days. The amount not paid the proportionate amount will be disallowed to avail credit. Simply recipient will not be allowed to take GST Credit. GST ITR Credit need to be reversed for non payment to vendor.

Create Separate Invoice of Retention Money

Possible solution for such situation is creation of a separate milestone invoices instated of withholding of retention money like 5% / 10 % etc. Execute a contact which will have milestone of work progress and terms of invoicing etc. This will ensure that cash flow of supplier will get managed. And Client can avail GST Credit on separate invoice.

What is Retention Money

Retention Money concept in popular in works contact business. Where supplier agrees that certain percentage of invoice will be paid by client after certain period. Generally Retention money percentage is 5 % / 10 % appx. This is carried to ensure quality of work and after sales service support.

Summary 

In case a portion of invoice value is retained by client then, the time of supply of service shall be the date of which such invoices are issued. It will also be noted that the full GST ITR can be availed on the amount so retained only at the time of such amount is paid to supplier.