GST - Misuse of Section 31(7) CGST Act 2017 to Defer GST on Goods Sent on Approval Basis

[KSA Associates]

Dear Forum Experts,

Suppliers are reportedly dispatching goods on an “approval basis” and delaying GST invoice issuance until customer approval, relying on Section 31(7) CGST Act 2017. While this provision allows invoicing at supply or within six months of removal, it appears open to abuse for cash-flow management and revenue deferment. Delivery challans under Rule 55 substitute tax invoices during transit, yet inadequate safeguards may enable artificial approval schemes.

Why cant a registered person can take benefit of this provision to defer the liability? Is there any case law, high court ruling on this?

[Sadanand Bulbule]

It is worth to refer the CBIC Circular No.108/27/2019-GST dated 18/07/2019.

[Shilpi Jain]

When there is a possibility to structure the business transaction to take benefit of this provision, there cannot be any issue.

However, if it is shown as sale on approval but in fact the goods are sold by the recipient well before the issue of invoice by the supplier, it clearly indicates that the recipient has received the ownership of the goods well before the invoice is issued by supplier under sale on approval (SOA). So in fact it is not a SOA. 

So certain other aspects are also to be taken care of before the transaction is executed.

AI Summary

Invoicing timing under Section 31(7) allows deferment of tax but risks recharacterisation where ownership passes earlier.
Suppliers invoking Section 31(7) to defer tax invoices for goods sent on approval may be subject to recharacterisation where recipients acquire or sell the goods before invoicing; delivery challans operate during transit but insufficient safeguards enable artificial schemes, and CBIC Circular No.108/27/2019 provides relevant administrative guidance.