GST Treatment for Goods Sent on Approval Basis: A Detailed Guide by DisyTax

GST Treatment for Goods Sent on Approval Basis: A Detailed Guide by DisyTax
The Goods and Services Tax (GST) regime in India has brought about significant changes in how businesses account for various transactions. One such area that often requires careful consideration is the treatment of goods sent on approval basis. This practice, common in industries like jewelry, art, and certain B2B supplies, involves sending goods to a potential buyer who has the option to either approve and purchase them or return them within a specified period. Understanding the GST implications of such transactions is crucial for accurate tax compliance and avoiding potential penalties. This detailed guide by DisyTax aims to provide a comprehensive understanding of the GST treatment for goods sent on approval basis.

Understanding the Concept of Goods Sent on Approval

Goods sent on approval basis, also known as “sale or return,” are a specific type of supply where the ownership of the goods does not immediately transfer to the recipient upon their dispatch. Instead, the recipient has the right to examine and approve the goods within a stipulated time frame. Only upon their acceptance or the expiry of the agreed period (if no explicit rejection is communicated) does the transaction become a confirmed sale.

This practice is beneficial for both the supplier and the potential buyer. It allows the buyer to assess the goods before making a purchase decision, while enabling the supplier to reach a wider customer base without immediately transferring ownership and potentially incurring tax liabilities prematurely.

Key GST Provisions for Goods Sent on Approval

Under the GST law, the treatment of goods sent on approval basis is specifically addressed to provide clarity on when a “supply” is said to have occurred for taxation purposes. The relevant provisions primarily revolve around the Time of Supply rules.

According to Section 12(2)(b) of the Central Goods and Services Tax (CGST) Act, 2017, the time of supply in respect of goods sent on approval or return basis or any similar arrangement, where the goods are removed before it is known whether supply will take place, shall be the earliest of the following:

• The date of approval or acceptance by the recipient.
• Six months from the date of removal of goods.

This specific provision overrides the general rules for the time of supply of goods, which typically focus on the date of invoice or receipt of payment. The rationale behind this special rule is to account for the uncertainty of the actual sale in approval-based transactions.

Time of Supply: When Does the Tax Liability Arise?

The time of supply is the crucial point that triggers the GST liability. For goods sent on approval, this liability arises at the earliest of the two conditions mentioned above:

• Date of Approval or Acceptance by the Recipient: The recipient explicitly communicates their approval or acceptance (in writing, via email, or through conduct such as making payment). The date of this communication is the time of supply.
• Six Months from the Date of Removal of Goods: If the recipient neither approves nor rejects within this period, the supply is deemed to have occurred on the day immediately following the expiry of six months.

Example 1:
A jewelry designer in Jaipur sends a necklace to a potential customer in Mumbai on March 1, 2025. The customer examines the necklace and sends an email to the designer on March 15, 2025, confirming their acceptance. In this case, the Time of Supply is March 15, 2025.

Example 2:
An art gallery in Delhi sends a painting to a collector in Chennai on April 1, 2025, on approval. The agreement states that the collector has three months to decide. However, if the collector doesn’t communicate their decision within six months (i.e., by October 1, 2025), the Time of Supply will be October 1, 2025.

Invoice Issuance: Timing and Requirements

The GST law mandates that a tax invoice must be issued for every supply of goods or services. For goods sent on approval, the invoice should be issued on or before:

• On or before the date the recipient communicates their approval.
• On or before the expiry of six months from the date of removal of goods.

Place of Supply: Determining the Location of Supply

The Place of Supply (PoS) rules for goods sent on approval are generally the same as for regular supplies involving the movement of goods. The PoS is determined by the location where the movement of goods terminates for delivery to the recipient.

Example 3:
A sports goods manufacturer in Jalandhar sends a consignment of cricket bats to a retailer in Bangalore on approval. The Place of Supply will be Bangalore, as that is where the movement of goods terminates for delivery. This will be considered an inter‑state supply, and IGST will be applicable.

Input Tax Credit (ITC) Implications for Suppliers and Recipients

Supplier’s Perspective:
The supplier can generally claim Input Tax Credit (ITC) on the inputs used in the manufacture of goods sent on approval, provided they meet all the other conditions for claiming ITC (possession of a valid tax invoice, receipt of goods, etc.). The act of sending goods on approval is not considered a supply at the time of removal, so the supplier doesn’t immediately need to pay output tax.

Recipient’s Perspective:
The recipient can typically claim ITC on the GST paid for goods received on approval only after they have approved the goods and a valid tax invoice has been issued by the supplier. If the recipient returns the goods without approval, they are not eligible for ITC.

Accounting and Record-Keeping Best Practices

Maintaining accurate records is essential for managing goods sent on approval under GST. Businesses should consider the following practices:

• Maintain a separate register for all goods sent on approval, including details like the date of removal, description of goods, value, recipient’s details, and the agreed approval period.
• Track the approval status and document all communications regarding approval or rejection.
• Monitor the six-month deadline for each consignment of goods sent on approval.
• Issue invoices on or before the time of supply as per the applicable rules.
• Keep proof of dispatch (e.g., delivery challans) and acknowledgment of receipt by the recipient.

Illustrative Scenarios and Examples

Scenario 1: Approval Within Six Months
A textile manufacturer in Surat sends a batch of sarees to a boutique owner in Hyderabad on May 1, 2025, on approval. The boutique owner informs the manufacturer of their approval on June 15, 2025.
Time of Supply: June 15, 2025 (date of approval).
Invoice should be issued by: June 15, 2025.

Scenario 2: Approval After Six Months
A handicraft artisan in Rajasthan sends decorative items to a retailer in Kolkata on January 10, 2025, on approval. The retailer informs the artisan of their approval on August 15, 2025.
Time of Supply: July 10, 2025 (expiry of six months from January 10, 2025).
Invoice should have been issued by: July 10, 2025. The supplier might need to issue a revised invoice or a credit note followed by a new invoice if the approval happens after the six-month period and the initial deemed supply needs adjustment.

Scenario 3: Goods Rejected by the Recipient
A book publisher in Chennai sends sample copies of new books to a distributor in Delhi on September 1, 2025, on approval. The distributor informs the publisher of their rejection on October 15, 2025 and returns the books.
Time of Supply: No supply occurs as the goods are rejected within six months. The initial dispatch was not a supply. The publisher should maintain records of the rejection and return.

Scenario 4: No Communication Within Six Months
A musical instrument supplier in Mumbai sends a guitar to a potential buyer in Goa on November 10, 2025, on approval. No communication is received within six months.
Time of Supply: May 10, 2026 (expiry of six months from November 10, 2025).
Invoice should be issued by: May 10, 2026.

GST Treatment for Goods Returned After Rejection

If goods sent on approval are rejected and returned by the recipient within the six-month period, the initial dispatch is not considered a supply. Therefore, no GST is applicable. The supplier should maintain proper records of the returned goods, such as a receipt voucher or acknowledgement from the recipient.

However, if the goods are returned after the six-month period has expired and a supply has already been deemed to have taken place, the supplier would need to issue a credit note under Section 34 of the CGST Act to adjust the tax liability. The credit note can be issued within the time limit specified in the GST law.

Practical Tips for Businesses Managing Approval-Based Goods (Powered by DisyTax)

For businesses that frequently engage in sending goods on approval, implementing efficient processes and leveraging technology can significantly streamline GST compliance. Here are some practical tips:

• Establish Clear Agreements: Have well-defined agreements with customers outlining the terms of the approval process, the time limit for approval, and the consequences of non-communication.
• Use Delivery Challans: Instead of tax invoices, issue delivery challans when sending goods on approval. This clearly indicates that it’s not a final sale.
• Implement a Tracking System: Use a robust tracking system (like the features offered by DisyTax) to monitor the movement, approval status, and the six-month deadline for each consignment of goods sent on approval.
• Automate Invoice Generation: Integrate your tracking system with your accounting software to automatically generate invoices on the date of approval or upon the expiry of the six-month period.
• Regularly Review Outstanding Approvals: Periodically review the status of goods sent on approval to ensure timely follow-up and compliance.
• Utilize DisyTax Features: Leverage DisyTax’s features for managing different types of supplies, generating accurate GST returns, and staying compliant with the latest regulations. DisyTax can help you track the time of supply for approval-based goods and ensure timely invoice generation.

Conclusion

The GST treatment for goods sent on approval basis requires a clear understanding of the specific rules related to the time of supply. By adhering to these provisions, businesses can ensure accurate tax compliance and avoid potential penalties. Proper record-keeping, timely invoice issuance, and leveraging technology like DisyTax are crucial for effectively managing such transactions under the GST regime. This detailed guide provides a solid foundation for businesses to navigate the GST implications of goods sent on approval and maintain a compliant and efficient operation. Remember to consult with tax professionals for specific guidance related to your business needs.