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
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 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.
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.
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.
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.
