GST on Goods Sent on Approval Basis (Sale or Return): 2026 Complete Legal Guide
In B2B commerce, especially within high-value industries like heavy machinery, art, textiles, and diamond jewellery, suppliers frequently dispatch goods to potential buyers for exhibition, trial, or testing. At the exact moment these goods leave the factory floor, a sale has not legally occurred. This creates a massive statutory predicament: If the goods are physically moving but haven't been sold yet, when exactly do you pay the government its tax?
The rules governing GST on goods sent on approval basis (commonly referred to as "sale or return" transactions) are among the most heavily scrutinized provisions by the Directorate General of GST Intelligence (DGGI). Misunderstanding the critical 6-month statutory deadline or prematurely generating a tax invoice traps millions of rupees in working capital, breaks the Input Tax Credit (ITC) chain, and inevitably triggers severe departmental penalties.
In this authoritative, long-form guide authored by Chartered Accountants, we dissect the rigorous statutory provisions of Section 12, Section 31(7), and Rule 55 of the CGST Act. Whether you are a manufacturer facing an assessment under GST or a trader trying to manage your delivery challans, this comprehensive FY 2026-27 guide provides the exact legal frameworks and real-world compliance strategies you need to operate flawlessly.
Basic Concept of Sale or Return Transactions in GST
What is GST on goods sent on approval basis? The GST treatment of approval goods dictates how tax is applied when products are dispatched for trial before a sale concludes. Ownership does not transfer immediately. The tax liability legally arises only when the buyer approves the goods, or when 6 months expire, whichever is earlier.
For beginners navigating GST basic terms, a "sale or return" contract provides the recipient the absolute right to examine, test, or display the goods. They can either accept them (completing the sale) or reject and return them. Because no definitive sale has occurred at the time of dispatch, the standard rules for the time, place, and value of supply in GST must be deferred to a future date.
Normal Supply vs. Approval Basis (Quick Comparison)
| Compliance Basis | Normal Supply | Approval Basis (Sale or Return) |
|---|---|---|
| Transfer of Ownership | Immediate (at the time of delivery). | Deferred (only after formal approval). |
| Document at Dispatch | Tax Invoice. | Delivery Challan (Rule 55). |
| GST Liability Triggers | Immediately upon invoice generation. | On the date of approval OR expiry of 6 months. |
| Input Tax Credit (ITC) | Buyer claims ITC immediately. | Buyer claims ITC only after approval and invoice issuance. |
GST Timeline for Approval Goods
- Day 0: Goods sent on Delivery Challan
- Within 6 months: Approval OR return
- Day 181: Deemed Supply triggered
- Immediately: Tax Invoice + GST payable
Expert Analysis: Where Most Websites Get Sale or Return GST Wrong
Many generic tax blogs oversimplify the "sale or return" concept, leading businesses into severe compliance traps. As Chartered Accountants handling complex litigation, we frequently see businesses fail audits due to these three hidden loopholes:
1. The Premature Invoicing Mistake
Many websites imply you can issue a tax invoice at dispatch "just to be safe" and issue a credit note later if goods are returned. This is legally flawed and financially reckless. Issuing a tax invoice prematurely means you are paying GST from your working capital months before a sale actually happens. The law explicitly provides Rule 55 Delivery Challans to prevent this exact cash-flow drain.
2. The ITC Premature Claim Trap
Receivers of approval goods often attempt to claim Input Tax Credit based on the delivery challan or physical receipt of the goods. Section 16 is absolute: No Tax Invoice, No ITC. Claiming ITC before formal approval is tax fraud and triggers Section 122 penalties.
3. The Rate Change Misinterpretation
What happens if you dispatch goods in March (GST rate 18%) but the buyer approves them in May (GST rate drops to 12%)? Most guides ignore this. The law mandates that the tax rate is determined by the Time of Supply. Therefore, you must legally charge 12% on the final tax invoice, not the 18% prevailing at dispatch.
Latest GST Updates, Amendments & Notifications (FY 2026–27)
What are the latest GST rules for approval goods? For FY 2026-27, the GST Council has mandated stricter real-time reconciliation between E-way bills generated for "delivery challans" and subsequent tax invoices. The foundational guidance remains anchored in CBIC Circular No. 10/10/2017-GST regarding the movement of goods on approval.
As per the latest GST notifications issued following the recent Union Budget and GST Council meetings, the tax department is heavily leveraging advanced AI to track the movement of GST on trial basis goods.
- Automated E-Way Bill Scrutiny: When a business generates an E-way bill selecting the sub-type "Sent on Approval", the GSTN portal starts a rigid 180-day countdown clock. If an offsetting Tax Invoice or a Return E-way bill is not electronically detected within 6 months, the portal automatically flags the supplier's GSTIN for scrutiny.
- E-Invoicing Enforcement: As amended recently, if your aggregate turnover mandates e-invoicing, you must generate the Invoice Reference Number (IRN) instantly upon the buyer's approval or exactly on the deemed supply date. Backdating invoices to bypass the 6-month rule is technologically impossible.
Are You Managing Your Approval Goods Compliantly?
Failing to track the 6-month statutory deadline triggers automatic tax liabilities and severe 18% interest penalties. Let our expert Chartered Accountants audit your delivery challans and e-way bill records today.
Legal Framework: CGST Act Section 31(7) & Time of Supply
When does GST become payable on approval goods? The time of supply for sale or return GST is legally triggered on the earliest of two dates: the exact date the recipient formally communicates their approval, or the day immediately following the expiry of 6 months from the date of physical removal.
To execute a "sale or return" transaction legally, businesses must master Section 31(7) of the CGST Act, which strictly governs invoicing timelines, thereby dictating the time of supply of goods under GST.
Rule 55: The Mandatory Delivery Challan Format
What document is used to send goods on approval? Goods sent on approval must be dispatched strictly under a Delivery Challan as per Rule 55 of the CGST Rules, 2017. A regular tax invoice cannot be issued at this stage because the supply has not yet concluded.
Since no sale has occurred at dispatch, the movement must be accompanied by a Delivery Challan issued in triplicate (Original for consignee, Duplicate for transporter, Triplicate for consigner).
Mandatory Contents of a Delivery Challan
To avoid confiscation during transit by GST officers, your delivery challan must contain:
- Date and a unique consecutive Challan Number.
- Name, Address, and GSTIN of the supplier.
- Name, Address, and GSTIN (or UIN) of the recipient (if registered).
- Harmonized System of Nomenclature (HSN) code and thorough description of goods.
- Quantity and Provisional Taxable Value.
- Tax rate and Tax amount (CGST, SGST, IGST) calculated provisionally.
- Place of supply (crucial for inter-state movement).
- Signature or digital signature of the supplier.
GST Compliance Checklist for Approval Basis Transactions
To avoid notices under the GST prosecution, penalty, and procedure framework, strictly follow this checklist for every dispatch:
- Delivery Challan Issued: Ensure Rule 55 challan is generated in triplicate before physical removal.
- E-way Bill Generated: Select "Sent on Approval" sub-type for consignments exceeding ₹50,000.
- Memorandum Register Updated: Log the dispatch date to track inventory that hasn't hit P&L yet.
- 180-Day Tracking System Active: Set alerts for Day 170 to either retrieve goods or prepare for invoicing.
- Tax Invoice Trigger: Issue E-invoice instantly upon receiving written approval from the buyer.
- GSTR-1 Reporting: Declare the sale in GSTR-1 ONLY in the month the approval or deemed supply occurs.
Real-Life GST Case Scenarios (Trader & Manufacturer)
Case Scenario 1: The Manufacturer's Deemed Supply Trap
The Situation: An industrial pump manufacturer in Delhi sends a ₹20 Lakh pump to a factory in Haryana for a 3-month trial on January 1st, under a Delivery Challan. The factory delays testing. By July 5th (past the 6-month mark), the manufacturer still hasn't issued a tax invoice, waiting for approval.
The Consequence: During a GST audit, the officer notes the E-way bill generated on Jan 1st. Because 6 months expired on July 1st, it became a deemed supply. The manufacturer failed to declare this ₹20 Lakh sale in their July returns. The officer issues a massive demand notice for the unpaid IGST, plus an 18% p.a. interest penalty under Section 50, and a Section 122 penalty for non-issuance of an invoice.
Case Scenario 2: Return AFTER the 6-Month Expiry (Trader)
The Situation: A diamond trader in Surat sends jewellery to a retailer in Mumbai. Six months expire. The trader compliantly issues a Tax Invoice on Day 181, pays the IGST, and the retailer claims the ITC. In month 8, the retailer fails to sell the jewellery and returns it.
The Compliance Fix: Because a sale was already deemed by law, the retailer cannot simply send it back on a delivery challan. The original Surat trader must issue a Credit Note under Section 34 of the CGST Act to reverse the sale. The Surat trader reclaims the GST wrongly paid, and the Mumbai retailer must reverse the ITC previously claimed.
Facing a GST Scrutiny Notice for Unbilled Goods?
Ignoring an E-way bill mismatch or a 6-month deemed supply notice leads to immediate bank account freezing. Let our expert tax litigators handle your compliance audits securely.
People Also Ask (GST Questions Answered)
What happens if goods sent on approval are not returned within 6 months?
If goods are not returned or explicitly approved within 6 months, the GST law treats it as a "deemed supply" on the day immediately following the expiry of the 6 months. The supplier must issue a tax invoice and pay the applicable GST to the government.
Is a delivery challan mandatory for goods sent on approval?
Yes. As per Rule 55 of the CGST Rules, a serially numbered delivery challan issued in triplicate is absolutely mandatory when dispatching goods on approval. Moving goods without it is a legal violation and can lead to confiscation during transit.
Can goods sent on approval be partially approved?
Yes. If a buyer approves only a portion of the goods and returns the rest within 6 months, the supplier must issue a Tax Invoice only for the approved quantity. The returned quantity is moved back under a delivery challan without attracting GST.
Which GST rate is applicable if the rate changes during the approval period?
The GST rate applicable is the rate prevailing on the exact "Time of Supply." If the rate changes between the date of dispatch (delivery challan) and the date of approval (tax invoice), you must legally apply the new rate active on the date of approval.
Can we issue an E-way bill on a delivery challan?
Yes. If the consignment value exceeds ₹50,000, generating an E-way bill is legally mandatory. The E-way bill must be generated against the Delivery Challan by selecting the specific sub-type "Sent on Approval" on the E-way bill portal.
How to show goods sent on approval in GSTR-1?
You do not show the dispatch of goods (delivery challan) in your GSTR-1 return. You only report the transaction in GSTR-1 in the specific month when the goods are formally approved by the buyer, or when the 6-month deemed supply period expires and the tax invoice is issued.
Is Reverse Charge Mechanism (RCM) applicable on approval goods?
No. The Reverse Charge Mechanism (RCM) does not generally apply to the supply of standard goods sent on approval. The supplier remains legally responsible for issuing the forward-charge tax invoice and depositing the tax upon approval.
Can the 6-month approval period be extended under GST?
No. The 6-month statutory limit defined under Section 31(7) of the CGST Act is absolute and cannot be legally extended by mutual agreement between the buyer and seller. Once 6 months pass, GST becomes payable by law.
What if goods are approved in a different financial year?
The transaction is taxed in the financial year the time of supply occurs. If goods are dispatched in March 2026 but approved in May 2026, the tax invoice is generated in May, and the GST is paid and reported in the FY 2026-27 returns.
Can I claim ITC if goods are destroyed while on approval?
No. If goods sent on approval are lost, stolen, or destroyed before the sale concludes, Section 17(5) of the CGST Act invokes blocked credit. The supplier must reverse the Input Tax Credit originally claimed on the raw materials used to manufacture those goods.
Conclusion
Navigating the rules for GST on goods sent on approval basis requires impeccable documentation, rigid timeline tracking, and a deep understanding of Section 31(7) of the CGST Act. The government provides businesses the essential flexibility to move goods for trial without immediate taxation, but this flexibility comes with the strict caveat of the 6-month deemed supply rule.
By strictly utilizing Rule 55 Delivery Challans at dispatch, legally deferring the tax invoice until formal approval, and rigorously auditing your 180-day e-way bill lifecycles, you can legally optimize your corporate working capital. Ensure your accounting ERP software is programmed to flag expiring approval periods automatically. This proactive approach completely neutralizes the risk of short-payment notices, compounding GST late fees and interest charges, and aggressive compliance audits in FY 2026-27. If you are structuring a new B2B trial program, ensure your online GST registration accurately supports multi-state delivery challan operations.
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Don't let complex 6-month deemed supply rules and delivery challan mismatches stall your corporate cash flow. Schedule a personalized consultation with DisyTax to safeguard your compliance, issue flawless documentation, and handle your GST returns accurately.
Frequently Asked Questions (FAQs)
1. What is the GST treatment of approval goods?
The GST treatment of approval goods dictates that tax liability arises only when the buyer formally approves the goods or when 6 months expire from the date of removal, whichever is earlier. At dispatch, only a delivery challan is issued.
2. When does GST become payable on trial basis goods?
The time of supply for GST on trial basis goods is triggered on the earliest of two dates: the exact date the recipient communicates their approval, or the day immediately following 6 months from the date of physical removal of the goods.
3. Can I issue a tax invoice when sending goods on approval?
No. Issuing a tax invoice at dispatch is legally incorrect. You must dispatch the goods strictly under a Rule 55 Delivery Challan. The tax invoice is only generated later upon the buyer's approval or the 6-month deemed supply trigger.
4. Can I claim ITC on goods received on a delivery challan?
No. The recipient cannot claim Input Tax Credit on goods received under a delivery challan. Under Section 16, ITC can only be legally claimed after the goods are approved and a valid Tax Invoice is issued by the supplier.
5. What happens if goods are returned within 6 months?
If the buyer rejects and returns the goods within the 6-month period, no supply has legally taken place. The goods are simply moved back on a delivery challan, and no GST is payable by the supplier.
6. What happens if goods are returned AFTER 6 months?
Once 6 months expire, the law treats it as a deemed supply, and you must issue a tax invoice and pay GST. If the goods are returned later, you must formally issue a Credit Note under Section 34 to reverse the sale and reclaim the tax.
7. What is Section 31(7) of the CGST Act?
Section 31(7) legally governs the invoicing of approval goods. It mandates that a tax invoice must be issued either at the exact time the buyer approves the goods, or exactly six months from the date of physical removal, whichever event occurs earlier.
8. Do I need to generate an E-way bill for sale or return goods?
Yes. If the consignment value exceeds ₹50,000, an E-way bill must be generated against the Delivery Challan for the movement of goods, selecting the "Sent on Approval" sub-type to validate the transit to the authorities.
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