GST on Goods Sent on Approval Basis (Sale or Return) – Complete Guide 2026
GST on goods sent on approval basis (sale or return): Under the GST treatment of approval goods, tax becomes payable on the earliest of:
- Date of approval by the buyer
- Expiry of the approval period (if specified)
- 6 months from the date of removal (if no period is fixed)
In sale or return GST cases, only a delivery challan (Rule 55) is issued at dispatch. Invoice and tax payment occur after approval or deemed supply.
Time of supply
For GST on approval basis, date of approval OR 6 months from removal (whichever earlier). If no period fixed, 6 months is default.
Delivery challan
Mandatory at removal under Rule 55. No tax invoice until approval or deemed supply – key part of GST treatment of approval goods.
6‑month rule
If no response in 6 months, it's a deemed supply on day 181. Invoice within 30 days – critical for sale or return GST compliance.
Return / rejection
Return within period = no supply. After 6 months, credit note needed with GST adjustment – part of GST on approval basis nuances.
1. What Are Goods Sent on Approval Basis?
Goods sent on approval (also known as “sale or return” basis) refer to a commercial practice where a supplier delivers goods to a potential buyer without immediately transferring ownership. The buyer has the right to examine, test, or evaluate the goods within a stipulated period and either approve (thereby completing the sale) or reject and return them. This arrangement is common in industries such as jewellery, art, machinery, books, textiles, and high-value B2B supplies.
Under GST, such transactions receive special treatment because at the time of dispatch, it is uncertain whether a supply will actually take place. The GST on approval basis rules provide clarity on when the supply is deemed to occur and how to document the movement of goods. Understanding these rules is crucial to avoid incorrect tax payments, penalties, and disputes.
2. Legal Framework: Section 12(2)(b) & Rule 55
Section 12(2)(b) of the CGST Act, 2017 (Time of supply of goods)
“where the goods are sent on approval basis, the time of supply shall be the date of approval by the recipient or the date of expiry of the period within which the approval is to be communicated, whichever is earlier.”
If no approval period is agreed – the law deems it to be 6 months from the date of removal. If the recipient does not return the goods within 6 months, supply is deemed to take place on the date of expiry of the 6 months (i.e., the day immediately after completion of 6 months). This is a cornerstone of GST treatment of approval goods.
Rule 55 of CGST Rules, 2017 – For transportation of goods on approval, the supplier must issue a delivery challan (in triplicate) instead of a tax invoice. The delivery challan should contain details such as description, quantity, value, place of delivery, and the approval period if any.
Important definitions: “Removal” means the physical movement of goods from the supplier’s place of business. The date of removal is the starting point for counting the 6-month period.
3. Time of Supply: When Does GST Become Payable?
The time of supply determines the tax period, the applicable GST rate, and the due date for payment. For GST on approval basis, the time of supply is the earliest of:
- Date of approval by the recipient (explicit communication – written, email, or conduct such as making payment).
- Date of expiry of the approval period if specified in the agreement/delivery challan.
- If no period is specified: 6 months from the date of removal – on that day, it becomes a deemed supply.
Example 1: A machinery manufacturer in Pune sends equipment to a buyer in Nagpur on 1 April 2025 on approval for 2 months. The buyer approves on 20 May 2025. Time of supply = 20 May 2025. GST payable in the May return.
Example 2: A jeweller in Surat sends ornaments to a customer on 1 January 2025 with no fixed approval period. The customer neither approves nor returns by 30 June 2025. Time of supply = 1 July 2025 (deemed supply). This is a classic sale or return GST scenario.
| Situation | Time of supply | GST payable in |
|---|---|---|
| Approval received within agreed period (e.g., 20.05.2025) | 20.05.2025 | May 2025 return |
| Agreed period expires 31.03.2025, no approval, goods not returned | 31.03.2025 | March 2025 return |
| No period fixed; goods sent 01.01.2025, not returned by 01.07.2025 | 01.07.2025 | July 2025 return |
| Goods returned on 15.04.2025 (within approval period) | No supply | No GST |
4. Approval Basis vs Normal Sale: Key Differences
| Basis | Approval / Sale or Return | Normal Sale |
|---|---|---|
| Ownership transfer | After approval | Immediate at delivery |
| Invoice issued | After approval or deemed supply | At the time of supply (usually with dispatch) |
| GST payment | Delayed until approval/6 months | Immediate as per invoice |
| Document at dispatch | Delivery challan (Rule 55) | Tax invoice |
| Return of goods | No GST impact if within period | Credit note required |
Understanding these differences is vital for correct GST treatment of approval goods.
5. Invoice and Documentation Rules
5.1 At the time of removal (dispatch)
Delivery Challan (in triplicate) as per Rule 55 must be issued. It should be serially numbered and contain:
- Name, address, and GSTIN of supplier and recipient
- Date of removal
- Description, HSN code, quantity, and value of goods
- Place of delivery
- Approval period (if agreed) – if not mentioned, the law implies 6 months
No tax invoice is issued at this stage.
5.2 At the time of supply (approval or deemed supply)
A tax invoice must be issued within 30 days from the date of supply. It is best practice to issue it immediately upon approval or on the date of deemed supply. The invoice should reflect the actual date of supply and the applicable GST rate on that date.
E‑invoice mandatory if aggregate turnover exceeds ₹5 crore and invoice value above threshold.
6. Place of Supply
The place of supply for goods sent on approval is determined by the location where the movement of goods terminates for delivery to the recipient. This follows the general rule for goods under section 10(1)(a) of IGST Act. If the recipient is in a different state, it is inter‑state supply (IGST); if same state, intra‑state (CGST+SGST).
Example: A Delhi-based supplier sends goods to a buyer in Mumbai on approval. The place of supply is Mumbai (Maharashtra). Hence, it is an inter‑state supply and IGST will be charged when the supply takes place.
7. Input Tax Credit Implications
Supplier’s perspective
The supplier can claim ITC on inputs used in manufacturing or procuring the goods sent on approval, provided all other conditions of section 16 are met (possession of tax invoice, receipt of goods, etc.). Sending goods on approval does not affect ITC eligibility, as it is not a supply at that point.
Recipient’s perspective
The recipient can claim ITC only after they have approved the goods and the supplier has issued a valid tax invoice. Until approval, the recipient does not hold a tax invoice and cannot claim ITC. If the goods are returned, no ITC arises.
8. GST Compliance Checklist for Approval Goods
- Issued delivery challan (Rule 55) for every dispatch on approval
- Mentioned approval period on challan (or default 6 months applies)
- Tracked 6-month deadline for each consignment using GST late fee calculator to avoid interest
- Issued tax invoice immediately upon approval or deemed supply
- Reported invoice in correct GSTR-1 month (month of supply)
- Maintained register of goods sent on approval with status
- Retained proof of return for rejected goods
- E-invoice compliance if applicable
9. Common Mistakes in Approval Basis GST
- ❌ Issuing invoice at dispatch: Leads to early GST payment and confusion. Fix: Use delivery challan only – a key GST on approval basis rule.
- ❌ Ignoring 6-month rule: No tracking results in missed deemed supply and interest. Fix: Set reminders.
- ❌ Wrong ITC claim by recipient: Claiming ITC before approval. Fix: Wait for invoice.
- ❌ No delivery challan: Violation of Rule 55, penalty risk. Fix: Always issue challan.
- ❌ Not mentioning approval period: Default 6 months applies, but better to specify.
10. Penalty & Interest for Non-Compliance
Interest u/s 50: If GST is paid late (after due date), interest at 18% p.a. from the due date to payment date. Use our GST interest calculator to estimate.
Penalty u/s 122: For issuing incorrect invoice or failure to issue invoice/delivery challan, penalty up to ₹10,000 or tax evaded, whichever is higher.
Late fee for return: If GSTR-1 or GSTR-3B is delayed, late fee of ₹50 per day (CGST+SGST) applies.
11. Accounting Treatment (Journal Entries)
At dispatch (no sale): Goods sent on approval account Dr. To Stock account (memorandum entry).
At approval: Bank / Debtors Dr. To Sales account, To GST output liability. Also reverse memorandum entry.
If returned: Stock account Dr. To Goods sent on approval account.
If deemed supply after 6 months: Same as approval entry on the date of deemed supply.
12. Industry-Specific Treatment
- Jewellery: High-value, often sent on approval. Track meticulously; approval period usually short. GST on approval basis for jewellery requires careful documentation.
- Books: Distributors send on approval; returns common. Ensure return within 6 months.
- Machinery: Long evaluation periods; always document approval period in writing.
- Textiles: Sample pieces sent; if not returned, deemed supply after 6 months.
13. Is E-Way Bill Required for Approval Goods?
Yes, if the consignment value exceeds ₹50,000, an e-way bill must be generated for the movement of goods, even on approval basis. The e-way bill should be based on the delivery challan. The validity period of e-way bill is based on distance, and if goods are returned, a separate e-way bill may be needed. Refer to our complete e-way bill guide for details.
14. GST Return Reporting
GSTR-1: Report the tax invoice issued at the time of approval/deemed supply in the appropriate month. Do not report delivery challans.
GSTR-3B: Pay tax by the 20th of the next month.
E-invoice: If applicable, generate IRN before invoice.
GSTR-1 entry for approval supply: Invoice no: INV/24-25/421 dt: 20.05.2025 Place of supply: Maharashtra (27) Rate: 18% (IGST) Taxable value: ₹2,50,000
15. Practical Scenarios with Timelines
Scenario A – Approval within period
📅 01.04.2025: Machine sent on approval (period 2 months). Delivery challan DC/101.
📅 15.05.2025: Customer approves via email. Time of supply = 15.05.2025.
📅 18.05.2025: Tax invoice issued with 18% GST. GST in May return.
Scenario B – Deemed supply after 6 months
📅 01.01.2025: Goods sent, no period fixed.
📅 No response till 30.06.2025 → Deemed supply on 01.07.2025. Invoice by 30.07.2025. GST in July return.
16. Frequently Asked Questions
Under GST on approval basis, if no response is received within 6 months from the date of removal (or the expiry of the agreed approval period, whichever is earlier), the transaction is deemed to be a supply. The time of supply is the day immediately after the completion of 6 months. You must issue a tax invoice within 30 days of that date and pay GST accordingly. If the goods are returned later, you may issue a credit note, subject to the time limits prescribed under section 34. Failing to issue an invoice on time may attract interest under section 50 and penalty under section 122.
No, issuing a tax invoice at the time of dispatch is incorrect under GST treatment of approval goods. At the removal stage, only a delivery challan as per Rule 55 is permitted. Issuing an invoice prematurely would mean paying GST before the supply actually occurs, leading to cash flow issues and potential mismatches in returns. The invoice must be issued only upon approval or on the date of deemed supply (after 6 months).
The time of supply determines the tax period and the applicable GST rate. If the approval occurs in the next financial year, the rate prevailing on that date applies. For example, if goods were sent in March 2025 but approved in April 2025, the GST rate as of April 2025 will be charged, and the tax liability will be reported in the April 2025 return (GSTR-1 of April/May). Ensure you issue the invoice with the correct date and rate. If there is a rate change between dispatch and approval, the later rate applies. This is a common query in sale or return GST scenarios.
Even if the recipient is unregistered, the same GST on approval basis rules apply. The supplier is liable to pay GST on the date of approval or deemed supply. Reverse Charge Mechanism (RCM) does not apply here; the supplier must collect and deposit tax. The invoice should still be issued with the recipient's name and address. If the recipient is unregistered, you cannot claim any exemption; you must charge GST as applicable.
Yes, the supplier and recipient can mutually agree to extend the approval period. However, if the extended period goes beyond 6 months from the date of removal, the supply is deemed to have taken place at the end of 6 months (unless approval occurs earlier). This means GST becomes payable at the 6-month mark even if the buyer hasn't approved yet. To avoid this, some suppliers issue an invoice at 6 months and later issue a credit note if goods are returned after approval. This area requires careful planning.
If goods are returned after the supply has been deemed (i.e., after 6 months or after approval), the supplier must issue a credit note under section 34 of the CGST Act. The credit note can be issued within the time limit prescribed: the later of September following the end of the financial year in which such supply was made, or the date of filing the relevant annual return. For example, if deemed supply occurred in July 2025, the credit note can be issued until September 2026 (if annual return filed by then). The supplier can reduce his tax liability, and the recipient must reverse ITC if claimed.
17. How DisyTax Simplifies GST Compliance
DisyTax offers automated tracking of approval deadlines, delivery challan management, invoice generation, and seamless GSTR-1/GSTR-3B filing. Our experts ensure you never miss a 6-month deadline and stay compliant. Whether you need GST registration online, GST return filing services in India, or help with ITC optimization, we've got you covered. Contact us today for personalized assistance.
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