Goods Sent on Approval Basis Before Transition to GST In India, the transformation of the entire tax system with the introduction of Goods and Services Tax (GST) was accompanied by taking away several indirect taxes and unifying them into a single tax. The transition, however, was not easy for businesses which were used to operating under the tax system due to the treatment of goods sent on approval basis. Prior to the implementation of GST, Indian businesses often dispatched goods to dealers, distributors, or customers on a returnable basis, i.e., they were free to either purchase or return the goods after inspecting them for their quality and suitability.
The focus of this article is the approval basis of goods sent before transition to GST, the taxation treatment of these goods under previous tax regime, and what businesses had to keep in mind while shifting to GST.
Understanding Goods Sent on Approval Basis Normally, goods sent on approval basis are defined as a transaction in which the seller forwards some goods to a buyer without an immediate payment and the buyer is allowed to accept or decline them within a period of time. Upon accepting goods, the payment gets recorded as a completed sale. If the items are not accepted, the items simply get sent back to the seller.
This approach is typical in cases where the buyer’s acceptance is needed prior to completing a sale due to quality, specifications or demand uncertainties. The buyer’s acceptance is common in sectors like textiles, jewelry, machinery, and consumer goods that use this as a method to ease the transactions as well as ensure buyer satisfaction.
Pre-GST Taxation on Goods Sent on Approval Basis Before GST was adopted, India had a complex taxation structure including Value Added Tax (VAT) , Central Excise Duty, and a Service tax among others. The tax treatment involving approval basis was complicated because some deemed sales counted as stock transfer while others did not.
1. Excise Duty: Normally, an excise duty is imposed under the Central Excise Act when a product is removed from a factory. There was no excise duty levied on returnable goods until a sale was confirmed which was the case in Approval Sale contracts.
2. Value Added Tax (VAT): Under the Sale on Approval contracts, VAT was charged only on finalized transactions. Goods that were returned within the approval period were not subject to VAT.
3. Forms and Documentation: Several states expect organizations to prepare delivery challans instead of tax invoices when dispatching items on approval. These delivery challans served as a way to monitor goods that were in motion without levying an immediate tax.
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Impact of GST on Goods Sent on Approval Basis Businesses that operated under a government approved system received prompt tax scam reduction benefits and credit returnability. With the approval of GST on July 1, 2017, there arose changes to the tax treatment concerning goods that were sent on approval basis. This created tax inefficiencies and aimed towards eliminate seamless credit flow. GST, while improving credit flow, required firms to modify their system for the handling returnable goods.
Key Changes in GST for Goods Sent on Approval Basis Tax Liability at the Time of Supply Return of goods within the timeframe may CERTAINLY seem more complicated than at face value. While we primarily process based on tax invoice, certain goods are sent out based on an approval system. These certain goods have a period for return, otherwise known as the approval period. The approval period ends with the buyer either taking or rejecting a risk associated with a gain and confirming the sale. Time expiry leads to no approval with confirmation, or six months pass.
Documentation Requirements As opposed to the earlier VAT and Excise Duty systems, GST has stricter requirements that ensure tracking of sale on approval basis transactions through sales documentation. Businesses must issue a delivery challan whenever goods are dispatched. If the sale is subsequently confirmed, tax invoices are generated.
Input Tax Credit (ITC) Considerations Prior to the implementation of GST, input tax credit systems were often put in place separately. GST permits a business to claim ITC regarding inputs used for goods that are sent on approval basis if invoicing and tax payment conditions are adhered to.
Comparison of Pre-GST and Post-GST Treatment of Goods Sent on Approval Basis The dominion in the taxation of goods sent on approval basis prior to and post GST is illustrated in the following table:
Aspect Pre-GST (VAT & Excise) Post-GST Tax Trigger Event Sale confirmation Sale confirmation or 6 months after dispatch Tax Applicability Excise duty at removal, VAT on sale GST applicable on supply after 6 months Documentation Delivery challan (for VAT), excise invoice if taxable Delivery challan initially, GST invoice upon sale Return Period Varies by state (typically 90 days) 6 months from date of dispatch Input Tax Credit Limited availability Available if proper compliance is maintained
Conclusion The shift to GST brought with it a new approach to the taxation of goods sent on approval basis. The previous tax treatment relied heavily on fragmented VAT and excise laws, which were much more complicated. After the introduction of GST, there was more automacy and less heterogeneity when it came to tax treatment. Businesses had to adapt by documenting more comprehensively and closely monitoring return timelines and tax liabilities.
By paying attention to sale on approval basis under GST, businesses would be better placed to comply with tax requirements and enjoy reduced operational tax implications. Careful attention to record-keeping, invoicing, and tax payments is paramount for businesses dealing with goods that are returnable.
FAQs 1. What exactly are goods sent on an approval basis? Goods sent on an approval basis are those which are shipped to buyers for examination and qualification prior to the sale. The sale is only tally if the buyer approves, otherwise, the merchandise must be returned.
2. How were goods sent on approval basis treated in the pre-GST tax era? In the GST tax era, such transactions were usually recorded with a delivery challan and some form of tax like VAT or excise duty was charged and postponed till the sale was guaranteed.
3. Does GST apply to goods sent on approval basis? Yes, under GST, such tax is applicable as long as the seller approves the sale or defaults and does not respond more than six months later from the time of dispatch.
4. In what way does the returnable basis affect compliance with GST? In the case of goods sent on a returnable basis, if they are returned within 6 months, GST is not applicable. If not, the goods must be paid for with GST in the declared goods value attached.
5. What is the necessary documentation for goods sent on approval under GST? A delivery challan must be provided when shipping the goods, alongside an invoice featuring tax once the buyer confirms the purchase.
6. Is it possible to claim input tax credit (ITC) for goods provided on a returnable basis? Yes, ITC may be claimed on inputs relating to goods provided on a returnable basis, provided that all GST compliance processes are fully adhered to.
7. What is the consequence of not returning goods sent on approval basis within six months? If the buyer fails to return the goods or does confirm the sale within the six month period, the seller is required to account for the transaction by issuing a tax invoice and subsequently paying GST for the transaction.
8. In what ways does sales on an approval basis differ from a regular sale? A regular sale involves a transfer of ownership of the item sold, while a sale on approval basis entails a transfer of ownership only after the goods have been accepted by the buyer.
9. What are the difficulties in the treatment of goods sent on approval basis under GST? Businesses will have to monitor the approval duration, keep adequate records, and ensure that the invoice is issued on time so that an undue exposure to tax happens.
10. Were there any provisions of the type in the goods sent on approval basis before the implementation of GST? Yes, the government made provisions of transition credits which permits businesses to revise taxes on sales made after the GST was operational and shifts from covering the old taxation system.
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