In our previous blog, we had discussed about the impact of GST on consignment sales. In this blog, we will be throwing light to an alternate mode of the similar supply i.e. sale on approval basis under GST.
What is sale on approval?
Sale on Approval is a business arrangement wherein an individual or company who is interested in purchasing a specific item is allowed to use the item for a given length of time. At the end of that time, if the individual is satisfied with the item, they agree to purchase it. However, if the individual is unsatisfied for any reason, they are allowed to return the item and are not committed to purchasing it.
Sale on approval basis under GST regime
Unlike consignment sales, sales on approval basis are not deemed as supplies under GST. Hence, in such a scenario, the principal can send the goods to the agent by issuing a delivery challan instead of a tax invoice, and without charging GST on the same.
However, once the goods are sold by the agent to the end customer, it implies that the agent has accepted the goods received on approval. Once this sale has been ratified by the agent, the principal can then issue the tax invoice, and charge GST. The agent, at his end, can collect the purchase invoice, and avail the input tax credit on the GST paid, while filing his returns and paying the output GST liability to the government. Balance amount of tax if any, can then be paid via cash.
When must tax invoice be issued for Sale on Approval?
The invoice with respect of goods sent on approval basis has to be issued at the earliest of:
- Before or at the time of supply
- 6 months from the date of removal of goods from factory / godown etc. (before supply)
If the goods are not approved within 6 months i.e. if the agent has not ratified any sales within 6 months, it will be deemed that sales of the said goods has taken place and a tax invoice will need to be raised by the principal. Another alternative could be the agent returning the goods to the principal within 6 months.
Sale on approval in GST transition period
With the advent of GST on 1st July 2017, businesses had good reason to worry about the taxability of goods sent on approval basis before GST and returned after 1st July. To make the process seamless, certain rules have been specified by the GST Council. The first thing to note here is, that the following rules will be applicable, only on those goods which were sent on approval basis not earlier than 6 months before the date of implementation of GST i.e. not earlier than 31st of January, 2017.
There can be two cases possible:
Goods returned within 6 months from GST implementation
For those goods, which have been sent on an approval basis, but are returned or rejected within a maximum of six months from the appointed day i.e. 1st July, no tax will be payable. However, the specified period of 6 months can be extended by a maximum of 2 months by the commissioner if there is sufficient cause.
Goods returned after 6 months from GST implementation
For those goods, which have been sent on an approval basis, but are returned after 6 months, GST will be applicable. However, who bears the GST will depend on whether the agent is a registered or unregistered dealer:
Case 1: Agent is a registered dealer
In case the person or agent returning the goods is a registered dealer, GST will be payable by the agent and the return of the goods will be deemed to be a supply by the agent to the principal.
Case 2: Agent is an unregistered dealer
In case the person of agent returning the goods is an unregistered dealer, GST will be payable by the principal or the person who has sent the goods on approval basis on ‘Reverse Charge Mechanism’.
GST forms to be submitted
As per the initial GST rules, every principal / consignor who had sent goods on approval basis under the previous law, was required to submit the details of such goods in FORM GST TRAN -1 within ninety days of the appointed day of GST implementation i.e. 1st July – in other words by 30th Sept. However, the date has been extended to 31st October, 2017, post recent discussions.
In summary, sale on approval basis under GST – will become purchase and sale transaction and there is no need to separately charge the GST on commission earned by the agent. This could reduce the compliance burden also when compared to the consignment sales method under GST. Under sale on approval basis, GST ensures that the working capital is not blocked on the tax amount unlike consignment sale, making it a more feasible option for businesses.
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