Meaning of Sale on Approval Basis

• A sale on approval basis refers to goods sent to a customer with the option to accept or return
  
• It is not considered a sale until the buyer approves the goods or a time limit expires
  
• This is common in industries like textiles, jewelry, or consumer durables
  
• The risk and ownership remain with the seller until approval or confirmation is received
  
• The transaction becomes a sale only after acceptance, triggering tax obligations
  

VAT Applicability Principles

• Under VAT law, tax is levied on the sale of goods, which includes transfer of property for consideration
  
• In the case of sale on approval, VAT is not applicable at the time of dispatch
  
• VAT becomes applicable only when the buyer accepts the goods or retains them beyond the approval period
  
• If goods are returned within the agreed period, no VAT is charged
  
• States may require dealers to maintain record of goods sent on approval separately
  

Documentation and Record-Keeping

• Dealers must issue a delivery challan instead of a tax invoice for goods sent on approval
  
• A clear mention of “approval basis” and return deadline should be included in the challan
  
• Separate registers or records of such transactions must be maintained
  
• On approval, a tax invoice should be raised, and VAT must be charged on the agreed price
  
• Returned goods must be accounted for properly with evidence of receipt
  

Time Limits and Tax Treatment

• Most states prescribe a time limit (usually 90 days) for approval, after which it is deemed a sale
  
• If the buyer neither returns nor formally accepts within this time, VAT becomes applicable
  
• VAT liability is calculated based on the date of deemed sale or confirmation
  
• Delay in raising the tax invoice beyond the approval period may lead to penalties or interest
  
• Reversal of input credit may be required if the goods are returned after being treated as sold
  

Audit and Compliance Considerations

• During VAT audit or scrutiny, authorities verify approval records and compliance with timelines
  
• Mismatches between delivery and invoicing may raise red flags or result in notices
  
• Dealers must maintain evidence of communication with buyers regarding acceptance or return
  
• Proper treatment helps avoid incorrect tax liability or disallowance of input credit
  
• It is crucial to distinguish approval basis transactions from regular sales in returns and records