Sale on Approval Basis under GST

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GST significantly transformed the indirect tax system in India, absorbing multiple state and central indirect taxes and eliminating the cascading effect of taxes on consumers. It helped business owners and manufacturers by creating a unified market, eliminating state barriers, and increasing the customer base. The transparent indirect tax system helped the government eliminate tax evasion and corruption and increase tax revenue and the GDP of the country. The competitive prices improved our trade in the global markets, leading to an increase in exports and an improvement in our balance of trade.

It is mandatory for all businesses with an aggregate annual turnover of over 40 lakh rupees for the supply of goods and a turnover of over 20 lakh rupees for services to register with GST. All registered businesses are required to follow the compliance procedures specified under the law, like issuing invoices for sales, reconciling the data in the auto-populated summarized returns, filing returns, availing input tax credit for the tax paid on purchases, claiming applicable refunds, etc. Sales, also called supplies, are taxable (except those exempted under the law) and are categorized into different types under GST, like regular supplies, nil-rated, zero-rated, and exempt supplies. Then there is a special kind of sale called the sale on approval basis. So what is this sale on an approval basis? Here we discuss in detail the definition and other aspects related to sales on an approval basis under GST.

Definition of Sale on Approval Basis under GST

A sale on an approval basis refers to a sales transaction in which the goods are delivered to the buyer for approval, and the sale is completed only after the buyer accepts the goods. The buyer can access the goods during the approval period and commit to the purchase. The purchaser can return the goods if he is not satisfied with them.

GST implications for sale on approval

Sales on an approval basis are not considered supplies under GST. So, in such transactions, the supplier can send the goods to the purchaser by issuing a delivery challan instead of a tax invoice, without charging GST. The other applicable conditions are:

  • Once the buyer approves the sale, the supplier issues the tax invoice and charges GST.
  • If the goods are returned within six months, GST is not applicable.
  • The supplier can extend the six-month period for a further period not exceeding two months if there is sufficient cause to extend it.
  • But if the purchaser fails to either approve or return the goods within six months or the extended period, then he is liable to pay the tax.

Transfer of ownership and the timing of GST liability in sale on approval

As per Section 7 of the CGST Act, for any activity to be considered a supply, it must satisfy two conditions. First, the supply should be for consideration. Secondly, it should be for the furtherance of business. Since the activity of sending the goods for sale on approval does not fulfil the two conditions, it does not fall within the scope of Section 7 of the CGST Act.

Ownership of the goods is transferred only when the buyer approves and purchases the product, duly paying the supplier along with GST. In other words, though the buyer has physical access to the goods, the ownership of the goods still belongs to the seller. The sale on approval closes when the buyer accepts the goods, and it is deemed an actual sale. If the buyer does not make a decision to either buy or return the goods within six months, he will be deemed to have accepted the goods. Then the ownership, benefits, and obligations will pass on to the buyer.

The time of supply in GST is the earliest of the following:

  • When the purchaser makes the payment towards the supplies
  • When an invoice related to the supply is issued
  • Six months, or the extended period of delivery of the goods.

Understanding sales on approval

  • Distinction between sale on approval and regular sales

In a regular sale, the purchaser pays the amount upon receiving the goods. Therefore, the transactions are treated as sale transactions, and revenue is recognized immediately. Whereas in a sale on approval, the sale is recognized and accounted for only when the buyer approves the goods and makes the payment. A sale is considered a taxable supply, whereas a sale on approval is not considered a taxable supply until it is accepted by the purchaser.

  • Goods taken out of India for sale on approval

Goods taken out of India for sale on an approval basis are not considered a supply under GST; they are not treated as exports. The goods can be accompanied by a delivery challan as prescribed in Rule 55 of the CGST rules. Execution of a bond or LUT is also not required since it is not deemed an export. If the buyer accepts the goods and purchases them within six months, then the goods are deemed to be sold, and the time of supply is the date of purchase. The supplier then must issue a tax invoice to the buyer and follow the procedure regarding the export of goods.

  • Movement of goods for sale on approval within or outside a state

The buyer has physical access to the goods, but the goods still belong to the seller. As per the latest clarification from CBIC, the supply of goods on an approval basis can be moved within or outside a state with a delivery challan, as per GST regulations. This provides a great relief to jewelry suppliers, as earlier it was mandatory for jewelers participating in B2C (business-to-customer) exhibitions outside the state of their registration to carry invoices and pay taxes, which caused many problems for them.

  • Goods for sale on approval basis before the transition to GST

If goods sent on an approval basis are rejected six months before July 1, 2017, then GST is not applicable. If the goods are returned after six months from the above date, GST is applicable.

Provisions of the goods sent on approval basis

Provisions relating to goods sent on approval being returned are specified in sub-section (7) of Section 31 of the CGST Act, read with Rule 55 of the Central Goods and Services Act. A combined reading of these provisions signifies that goods can be sent on an approval basis from the place of the registered supplier, either within the state or outside the state. Delivery challans and e-way bills, wherever applicable, must be issued, and interstate supplies attract IGST. It is also clarified that the rule is applicable to all goods supplied under similar circumstances.

Benefits of sale on approval

  • Sale on approval gives the purchaser a chance to inspect the goods before making the actual purchase.
  • Purchasers use the opportunity to advertise and induce the sale of their goods, while buyers get the chance to try new products before buying them.
  • The risk of loss remains with the seller until the buyer receives and accepts the goods.
  • If the buyer wants to return the goods, he can do so without any risk of loss or expense, as the seller must bear them if the purchaser returns the goods within the stipulated period.

Also read: E-waybill Documentation for Goods Sent on Approval

Compliance guidelines for sale on approval

Some of the important compliance guidelines for sale on approval are:

  • Accurate documentation

Proper documentation is crucial in a sale on approval. The seller must maintain proper records of goods sent to the buyer, like details of delivery challan, record of acceptance or rejection by the receiver of the goods, subsequent invoices, etc. Sale-on-approval transactions must be recorded separately and not mixed with the regular ones to avoid confusion.

  • Delivery challan

The delivery challan is an important document in a sale-on-approval transaction. It must contain accurate details, including date, challan number, details of the consignor, consignee (name, address, GSTIN), details of goods (description of goods), quantity, taxable value, GST rate, place of supply, and signature. It must be prepared in triplicate in accordance with the GST rules, marking the original copy for the consignee, the second for the transporter, and the third for the consignor.

  • Time of supply

In a sale-on-approval transaction, the time of supply is important for determining the tax liability. The time of supply for goods supplied on approval is the time at which the purchaser accepts or rejects them, or the time when the specified period of six months lapses and the buyer fails to either accept or reject the goods. The validity period, like the approval time of the sale, must be clearly indicated to the buyer to avoid future compliance problems.

  • Return of goods

If the buyer wishes to reject the goods,  the seller must follow the prescribed procedure and ensure the buyer also follows the protocol as per the GST rules for returning the goods.

  • Tax liability

If the buyer accepts the goods within the specified period, it becomes a taxable supply. The seller is liable to collect and remit GST on the sale. If the buyer rejects the goods, the transaction is not considered a supply, and no GST is applicable.

  • Input tax credit

The seller can avail input tax credit on the tax he has paid on the inputs used in the manufacture of the goods if the buyer accepts the goods in the sale on an approval basis or returns the goods within the specified period and all conditions for claiming ITC are satisfied.

  • Record maintenance

The seller and buyer both must maintain proper records of the transactions pertaining to the sale on approval for reconciliation and audit purposes.

  • Communications with the purchaser

Proper communication with the purchaser is important so that they understand the terms and conditions of the sale and the requirements relating to the sale approval.

  • Monitoring and training

Businesses must constantly monitor the changes in rules and procedures by updating on modifications and following up on the notifications and advisories issued by the department from time to time. The staff members must also be trained on the compliance procedures regularly.

  • Professional guidance

Seeking guidance from tax professionals can help businesses navigate the complexities of GST compliance and avoid inquiries and notices from the tax authorities.

Read more: Delivery Challan under GST: Meaning, Rules & Format

Best practices for sale on approval

  1. Agreement of terms of the sale on approval

The seller must indicate the terms of sale on approval from the purchaser and sign a formal written agreement mentioning the important details of the sale, like the validity period, rejection terms, and expenses-related matters.

  1. Description of the products

The product description regarding its features and constituents must be accurate so that the purchaser gets the correct idea of the product.

  1. Insuring the product

It is also important to insure the product so that losses or damages during transit, theft, etc. can be covered.

  1. Accuracy of information

The seller must ensure the accuracy of the information about the products as well as the terms and conditions of the sale so that there are no complications in the future.

  1. GST compliance

Businesses must comply with the GST requirements by updating the latest notifications issued by the department and training the staff members who manage the financial activities of the business.

  1. Advanced invoicing and inventory management

Businesses can opt for techno-savvy billing and inventory management professionals like who provide efficient solutions that help reduce costs and manage businesses smoothly.


It is important for businesses to understand the key concepts of the sale-on-approval business and the implications of GST on such transactions. They need to adhere to the guidelines to ensure smooth operations and stay compliant with the specified rules and regulations. Following the best practices and seeking guidance from tax professionals or consultants can help businesses sail through the complexities of GST compliance effortlessly.

Frequently asked questions

  1. Can the goods in a sale on approval be moved outside the state of the registered supplier?

Answer: Yes, as per the provisions of GST law, the supply of goods under approval can be taken on a delivery from the place of business of the registered supplier to the place of the purchaser, either within the state or outside the state.

  1. What are the important documents in a sale on approval?

Answer: The delivery challan with the e-way bill, wherever applicable, issued at the time of delivery of the goods are the important documents in a sale on approval. The invoice is issued once the purchaser accepts the sale.

  1. What is the time limit for the sale on approval?

Answer: If the recipient of the goods does not accept or return the goods within six months, it is deemed to be a sale, and GST is applicable on the sale.

  1. What is the recourse for an unpaid seller?

Answer: The unpaid seller’s rights include a right to lien, the right to resell the goods, the right to claim damages, the right to retain the goods, and the right to legal recourse.

author avatar
Vidya Sagar Freelance Writer
Vidya Sagar has post graduate and Law graduate qualifications. She has worked in the finance industry for many years. She is passionate about writing and keen on writing articles related to tax, accounting, audit, and other finance related topics. She likes to simplify complex financial matters to help her readers understand easily. She reads a lot in her spare time and keeps herself updated with the latest financial news. She likes helping people in all their financial and compliance requirements

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