Consignment shops is very popular these days. By engaging a consignment dealer, consignors do not have to spend time and money in advertising and selling products. Sometime, consignment sales can lead to more affordable prices, which makes consignment shops more attractive to customers. Therefore, consignment becomes a preferable choice for the sales of art works, second-hand furniture, clothing, etc. However, the tax issues relating to this business mode is a little bit puzzling.
To find out the answer, we must first understand how consignment works. It is an arrangement in which goods are left in the possession of an authorised dealer to sell. Typically, there are two modes to realise consignment dealing, and choosing either of them will lead to different GST implications.
One is that the consignment dealer purchases the goods from the original owner when it finds a buyer, which is also called “sale or return” sales. The dealer can return any unwanted items to the supplier, so it is more commercially beneficial to the dealer. In this way, the ownership of goods passes to the dealer first and then to the final buyer. In this situation, the basic rules prescribed under section 9-40 of the GST Act, which states that the supplier is responsible for collecting and remitting GST, applies. The dealer must pay GST on the agreed price of the goods when purchasing it from the consignor. However, after the dealer sells those goods, it can claim a GST credit for the GST already borne when purchasing.
The other mode is “agent” sales, where the dealer sells goods as an agent, and ownership of goods is directly transferred to the buyer. Therefore, the supplier is liable to pay GST if it is registered for GST. At the same time, the consignment dealer earns a commission from the revenue from the sales. For this commission, the dealer needs to include GST.
We strongly recommend that consignment dealers assess which sales model they belong to based on their own business characteristics and fulfill their tax obligations accordingly.
