Consignment Sales under GST
What is a consignment sale?
A Consignment Sale is a trade arrangement in which a seller sends the goods to a buyer or reseller; but the payment to the seller happens as and when the goods are sold. The seller remains the owner of the goods or, in other words, the title holder of the goods until they are paid for in full and also, after a certain period, takes back the unsold goods. In most of the cases, such resellers work on a commission basis. Consignment sales under GST has a relatively new treatment which need to be evaluated by businesses.
Key features of a consignment sale
- The relation between the two parties is that of consignor (one who sends the goods for sale) and consignee (one who sells the goods to the end customer), not that of seller and buyer.
- The consignee is entitled to receive all the expenses in connection with consignment. In few cases, consignee is entitled to a 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.
Consignment sale in the previous regime
In the previous regime, the consignor would send the goods to the consignee without any payment of VAT as there was no sale involved at this stage. Similarly, in the case of interstate transfer of goods for consignment, no CST or Form F procedure was involved. Taxation would come into the picture only when consignee would sell the goods to the end customer.
Now, depending on whether a certificate had been issued by the consignor to the consignee, 2 cases would arise:
Case 1: Consignor had issued a certificate to consignee
In this case, the consignee would pass on to the consignor – the amount collected from the customer (including VAT / CST), minus his commission, and minus the service tax charged on the commission. While filing their returns, the consignor would then pay the VAT component to the respective State government, and the consignee would pay the service tax component to the central government.
Case 2: Consignor had not issued a certificate to consignee
In this case, the consignee would pass on to the consignor – the amount collected from the customer, minus the VAT/CST charged, minus his commission and minus the service tax charged on the commission. While filing returns, the consignee would then pay both – the VAT component to the respective state government, as well as the service tax component to the central government.
Now, the point to be noted is, that, if the consignor was a trader not registered under excise or service tax in the previous regime, he could not avail credit of the service tax charged by the consignee. Also, for the goods sent on consignment basis to other states, there were specific provisions laid down for reversal of a specific percentage of input VAT credit.
Consignment sale under GST regime
Before we delve into the possible impact of GST on consignment sales, we need to be familiar with a couple of definitions, which have been introduced with respect to a consignment sales scenario:
- Agent – means a person, 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 – in other words, the consignee. Agents are required to get mandatorily registered irrespective of the threshold limit.
- Principal – means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both. In other words, the consignor.
Now, the key difference, is that as per the GST rules, both agent and principal, although part of the same organisational framework, will be considered as distinct persons as par as taxation is concerned. Thus, if there is a transfer of goods or services between the principal and the agent, GST will be applicable, even if there is no consideration between the two.
Valuation of consignment sales under GST
As per the CGST Act, supply of goods by a principal to his agent even without consideration, is treated as a supply and shall be liable to GST – and thus consignment sales have become taxable under GST. As per GST valuation rules, GST will need to be charged, either on:
- the open market value, OR
- 90% of the sale price charged by the agent to the end customer, at the option of the principal.
However, the agent / consignee can avail input credit of the GST charged by the principal / consignor.
GST on consignment sales
As discussed above, the principal / consignor will need to charge GST from the agent / consignee, which he will pass on the government while filing his returns. Similarly, while selling the goods to the end customer, the agent / consignee should charge GST from the customer, post which he will pass on the collected GST to the government, while filing his returns. In addition, the agent / consignee has to charge GST at 18% on the commission, from the principal / consignor and pass that on to the government as well.
However the relief is, that while paying tax to the government, both principal and agent can adjust the same against their input tax credit and the remaining balance, if any, can be paid through cash.
Needless to say, since consignment sales under GST has become a taxable supply, the following difficulties are bound to emerge:
- Working capital of the agent will be blocked as GST needs to be paid at the time of receiving goods from the principal on consignment basis.
- Working capital of the principal too will be impacted, as GST on the commission will need to be paid to the agent.
Overall, consignment sales in GST seems to be a mixed bag. This poses a pertinent question in front of us – is there an alternative to the consignment sale? Yes, there is – sale on approval, which we will discuss in our upcoming blogs.
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Author: Pramit Pratim GhoshPramit, who has been with Tally since May 2012, is an integral part of the digital content team. As a member of Tally’s GST centre of excellence, he has written blogs on GST law, impact and opinions - for customer, tax practitioner and student audiences, as well as on generic themes such as - automation, accounting, inventory, business efficiency - for business owners.
Pramit Pratim Ghosh
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