GST on Retention Money of Contractor Invoice
Retention Money is normally used in works contact . Where supplier agrees that certain percentage of invoice will be paid by client after certain period. Normally Retention money percentage is 5 % / 10 % appx. This is retained by the customer/ recipeint from Supplier invoice to ensure quality of work /Performance of work and is released after certain period of time ( say one year after completion of work)
GST Treatment on Retention Money (in the Books of Supplier /Contractor)
- Issue Full invoice (including GST to customer). Say Total Invoice value is RS 60 Lakh
- Pay GST on Full amount of invoice ( GST on 60 Lac )
- File GSTR 1
- File GSTR 3 B
GST Treatment of Retention Money (in the Books of Customer )
- Avail GST Input Tax 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 Input Tax Credit in GSTR 3B
- Avail balance GST Credit after payment of retention money.
Why retention money is problem for Contractor and Recipient ?
Customer/recipient : GST Input Tax Credit is disallowed to customer/recipient only if he makes payment to vendor within 180 days. If the amount is not paid than the proportionate amount of Input Tax Credit needs to be reserved in GSTR 3B.
Contractor : works contractor need to pay GST on full invoice amount.
How to Solve problem of retention money to avoid blockage of funds ?
Possible solution for such situation is creation of a separate milestone invoices in stated 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.