GST impact on consignment sale
Consignment sale is not new in the present business scenario. However, there are few consequences (pros and cons) on Consignment sale due to implementation of new indirect tax law i.e. GST. The author tried to explain the impact of GST on the consignment sale. This article written in question and answer format for better understanding.
What is meant by Consignment sale?
sale is a trade arrangement in which seller sends the goods to a buyer or reseller who pays the seller as only as and when the goods are sold. The seller remains the owner (title holder) of the goods until they are paid for in full and, after a certain period, takes back the unsold goods. Most of the cases, the reseller or third-party work on commission basis.
What are the key features of the consignment sale?
The following are the features of the consignment sale i.e.
The relation between the two parties is that of [consignor] and [consignee], not that of buyer and seller.
The consignee is entitled to receive all the expenses in connection with consignment. In few cases, consignee would be entitled to certain percentage in the sale proceeds.
The consignee is not responsible for damage of goods during transport or any other procedure.
Goods are sold at the risk of the consignor with profit or loss belonging to the consignor only.
Explain the impact of indirect taxes under present taxation system??
Consignor send goods to the consignee without payment of VAT/CST as there is no sale involved at this stage. In case of interstate transfer of goods for consignment, no CST subject to compliance of Form-F procedure. Consignee charges VAT/CST on sale of goods to end customer (for example if goods value is Rs.100 and applicable VAT rate is 14.5%, then consignee will collect Rs. 114.5 from end customer).
In most of the States, if consignor has given the certificate to the consignee, then Consignee will send the amount collected from the customer including VAT/ CST after keeping his commission and service tax on that (for example if commission is Rs.20, then consignee will send Rs. 91.5 i.e. sale value Rs.114.5 minus commission Rs. 20 minus service tax Rs. 3). Consignor will pay VAT Rs. 14.5 to the State Government and consignee will pay service tax Rs. 3 to the Central Government.
If consignor doesn’t issue certificate to the consignee, consignee will send Rs. 77 and consignee will pay VAT to the state government and service tax to the central government.
If the consignor is mere trader and not registered under excise or service tax, he can’t avail credit of service tax charged by the consignee. Also, for the goods send on consignment basis to other states, there are provisions for reversal specific percentage of input VAT credit.
What are the important definitions under GST regarding consignment sale??
i. Including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another called Agent.
ii. principle is the person to whose behalf an agent carries on the business of supply or receipt of goods or services or both called priciple.
Explain the impact of GST on consignment sale??
Entry no. 3 of schedule I of CGST Act 2017, Supply of goods by the principle to his agent even without consideration us treated as supply and shall be liable to GST.
Rule 29 of CGST Rules specifies that GST needs to be charged on open market value or at the option of consignor 90% of sale price charge on those goods by the recipient to end customer. However, the consignee can avail input credit of the GST charged by the consignor.
While selling the goods, consignee should charge the appropriate GST to the customer (i.e. Rs. 100 + GST). Consignee should pay the collected GST to the Government. Consignee has to charge GST @ 18% on commission and pay to the government. However, while paying tax to Govt. consignee can adjust it against the input credit and remaining balance if any can be paid through cash.
What are the difficulties faced for continuing consignment sale under GST??
Working capital blocked for the consignor as the tax needs to be paid at the time of sending goods to consignee on consignment basis.
Consignee should avail the credit of GST paid by the consignor even though those goods are not accounted as purchases in the books of consignee. This could pose accounting difficulties for consignee.
Is there any other alternative under GST for consignment sale??
The alternative to consignment sale is ‘sale on approval’.
Section 31 (7) of CGST Act specifies that where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice will issued before or at the time of supply or six months from the date of removal, whichever is earlier.
In the case of sale on approval basis, consignor can send the goods by issuing delivery challan instead of tax invoice and without charging GST on the same. Consignee should charge GST when the goods are sold to end customer.
Sale of goods by consignee to end customer implies that consignee accepted the goods received on approval. Consignor can send the sale invoice for the goods already sent on consignment once he receives the confirmation from the consignee i.e. consignor ratifies the sale made by the consignee. Consignee can collect purchase invoice and avail credit on the said invoice. Input credit can be utilised while paying the output GST liability to Govt. and remaining balance if any can be paid through cash.
In summary, the said arrangement will become purchase and sale transaction and there is no need to separately charge the GST on commission earned by the consignee. This could reduce the compliance burden also when compared to consignment sale method under GST.
What if the goods are not sold by the consignee within 6 months under the sale on approval basis??
If the goods are not approved within 6 months, the said goods would be treated as the sale of goods and tax invoice needs to be raised by Consignor. Another alternative would be to return the goods to consignor.