Overview

Sale on Approval is a business arrangement wherein an individual or company who is interested in purchasing a specific item is allowed to keep the item for a given length of time. At the end of that time, if the individual is satisfied with the item, he agrees to purchase and retain it. However, if the individual is not satisfied for any reason, he is allowed to return the item and is not committed to purchase it.

Unlike consignment sales, sales on approval basis are not considered as ‘supplies’ under the Indian Goods and Service Tax (‘GST’) regime. 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.

As per Section 31(7) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), 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 sale of the said goods has taken place and a tax invoice will need to be raised by the principal. Another alternative could be for the agent to return the goods to the principal within 6 months.

In view of the COVID-19 Pandemic, Notification No. 35 / 2020 – Central Tax dated 03.04.2020 was issued by the Central Board of Indirect Tax and Customs (‘CBIC’) extending the time limit for compliance upto 30th June 2020. It gave a relaxation to the assessees in a scenario where compliances which otherwise fell during 20th day of March, 2020 to 29th day of June, 2020, could not been made within such time.

Recently such a relaxation from compliances with respect to goods sent abroad for approval of sale / return has also been given by CBIC by way of Notification No. 66 / 2020 – Central Tax dated 21.09.2020, where such compliances under Section 31(7) fell during the period from the 20th day of March, 2020 to the 30th day of October, 2020.  In simple words relaxation has been given for such non-compliances by extending the date for compliance upto the 31st day of October, 2020. This relaxation has been given by the Government of India to GST registrants in the wake of COVID-19 Pandemic and the resultant lock down.