VAT Liability: Differences Between the Sale of Goods and Consignment Sales
The ‘Sale of goods’ and ‘Consignment Sales’ are both considered as sales from a business perspective. However, from the Revenue Department’s perspective, there are differences in VAT liability between the two. Before we explain such differences, we should first understand the meaning of “Sale(s)” under the Revenue Department’s definition.
The Revenue Department defines the meaning of ’Sale(s)’ as “the disposal, distribution or transfer of goods, whether or not for benefit or a consideration, including: (b) delivery of goods to an agent for sale under Section 77/1.” Moreover, the ’Sale of Goods’ is subject to VAT liability under Section 78 of the Revenue Code, as follows:
“Section 78 - Subject to Section 78/3, the liability to VAT on the sale of goods shall be in accordance with the following rules:
(1) Tax liability for the sale of goods - other than those specified in: (2) (tax liability for the sale of goods under a hire-purchase contract or installment sale contract); (3) (tax liability for the sale of goods through an agent appointed to sell such goods); (4) (tax liability for the export of goods); or (5) (tax liability for the sale of goods is subject to VAT at zero rate (for a “zero-rated good,” the government doesn't tax its sale but allows credits for the VAT paid on inputs. If a good or business is “exempt,” the government doesn't tax the sale of the good, but producers cannot claim a credit for the VAT they pay on inputs to produce it))) - in general cases shall take place at the time of delivery of the goods, except in the case where the following events take place before the delivery of goods, in which case the tax liability shall occur from the time when such events take place:
(a) Transfer of ownership of goods;
(b) Payment received for goods sold; or
(c) Issuance of tax invoice.
Provided, however, that the liability arises shall be proportionate to the extent of such acts.
In other words, tax liability in the general sale of goods occurs immediately at the time the goods are delivered. This is commonly known as the “tax point”.
On the other hand, the sale of goods concept is different from the concept of ‘consignment sales’, which is an exception under Section 78 (3) of the Revenue Code because it is a concept where goods are delivered by the supplier to the agent with the intention to sell those goods. The goods are then kept by the agent; the tax liability for sales of the goods will only occur when such goods are actually sold - not when the goods are merely delivered.
The business operator can only enjoy said VAT liability benefit from consignment sales when they strictly comply with the rules and regulations of the Revenue Department. In addition, due to the principle of ‘interpretation of the law’ (in law, interpretation refers to exposing the true sense of the provisions of the statutes and to understand the exact meaning of the words used in any text. Interpretation refers to the linguistic meaning of the legal text), any exceptions must also be interpreted strictly. Under Section 78 (3)*1 of the Revenue Code, in case of sale of goods through a sale agent whereby goods have been delivered to the agent, only if the agency agreement follows such rules, procedures, and conditions designated or prescribed by the Director- General, all liability, shall take place at the time of delivery of goods to the purchaser, except in the case where the following events take place before the goods are delivered to the purchaser, in which case the tax liability shall occur at the time such event takes place:
(a) An agent transfers the ownership of goods to the purchaser;
(b) An agent receives payments for goods sold;
(c) An agent issues a tax invoice; or
(d) Goods are used whether by an agent or other persons.
Provided, however, that the liability arises shall be proportionate to the extent of such acts.
Consequently, VAT liability for the sale of goods through appointed agents takes place at the time when goods have been delivered to the end purchaser in accordance with the following rules, procedures and conditions:
Notification of the Director-General of the Revenue Department on Value Added Tax (No. 8) (“Notification No. 8”), which specifies rules, procedures and conditions for contracts in the appointment of agents to sell certain categories of goods under Section 78 (3) of the Revenue Code:
Clause 1. It must be an agent contract to sell goods, where agents receive compensation or gratuity from the supplier as specified in the agent contract.
Clause 2. The contract under Clause 1 must be made in writing and be a contract appointing an agent to sell a particular category of goods or all categories.
Clause 3. The supplier and his representative must be VAT registrants. Agents are required to issue full tax invoices with each sale and deliver it to the purchaser as soon as tax liability occurs, in accordance with Section 82/3 of the Revenue Code.
Clause 4. The supplier and the agent must keep the original contract of appointment of an agent at the head office for not less than five years from the contract termination date.
Clause 5. The supplier must notify the revenue officer of the contract to appoint an agent to sell within 15 days from the date of such contract to appoint an agent at the Area Revenue Office or the Local Area Revenue Branch Office where the head office of the supplier is located.
Clause 6. Agents must prepare reports for goods and raw materials, which shall be prepared separately from the goods and raw materials report of its own under Section 87(3) of the Revenue Code.
As aforementioned, the consignment sales method is more suitable and commonly used as a sales strategy to encourage sales and marketing in the heavy machinery industry due to the high value of the goods. Therefore, it would not be fair or beneficial for the agent to purchase machines without any actual income from selling them as end goods because the expenses and risks involved would be too high. Consequently, if both the supplier and agent strictly comply with the above rule and regulation, they can enjoy this tax benefit.
On the other hand, the consignment sales method is not suitable for retail sales of consumer goods as it is not practical, since most consumer goods buyers do not often provide their tax ID information for buying a few consumer goods on each purchase.
Therefore, if the consumer goods consignee decides to use other sources to issue the full tax invoice, it could be considered as the wrong issuance of tax invoices with the essence of the item being incorrect. If the revenue officer traces it back and finds a tax invoice that has been issued incorrectly, there are penalties for such breach, with the risk of a criminal fine of Baht 2,000 for each incorrect full tax invoice. Moreover, if the consignee is unable to issue a full tax invoice on behalf of the consignor and does not make a stock inventory and raw materials report on behalf of the consignor separately from their own, it does not qualify as a consignment sale. There is a risk that the Revenue Department can interpret such as the sales of goods, which could lead to the risk of immediate tax liability upon the delivery of goods. However, if tax was filed using the tax point at the time the agent delivered the goods to the end customer, it would be deemed as the wrong tax point, resulting in a deficit of output sales tax filing. Consequently, taxes must be paid along with a penalty of twice the delivered goods’ price and a surcharge of 1.5% per month. Furthermore, regarding the contracting parties who have remitted the input and output VAT as their own taxes on the day upon which the consignee delivered goods to the end consumer, this is considered a deviation from the actual sales tax liability. In other words, it would be a remittance of tax deviating from the tax point for the sale of goods that actually occurred, which is considered as filing excess input VAT and inadequate output VAT. In such a case, each party may have to apply for the return of such taxes, which would inevitably lead to being investigated or audited by the revenue officer eventually.
In order to avoid any penalty or surcharge for the incorrect issuance of a full tax invoice, the following are the recommended guidelines for issuing a tax invoice:
1. If there is the agency agreement, issue of consignment note first and then issue tax invoices when the agent delivered such goods to the end buyers, except where any of the following acts occur before the delivery then liability shall be deemed to arise upon the occurrence of such acts: (a) transfer of the ownership of the goods by the agent to the buyer, (b) the agent payment of the goods, (c) issuance by the agent of tax invoice, or (d) appropriation of the good for use by the agent or any other person.
2. If there is no contract to appoint an agent to sell or the parties are unable to complete the compliance procedures prescribed by the Notification of the Director-General of the Revenue Department concerning VAT liability, tax invoices must be issued for general sales when the goods are delivered to the purchaser. Furthermore, agents have their own staff and prepare their own stock inventories and raw materials reports, and are responsible for their own shortages. Nonetheless, in order to alleviate the burden of tax, the seller could require the agent to pay for the goods when the goods are sold on a daily basis at the agreed purchase price. Moreover, in the event that a return is required, the seller can accept the return under the terms and conditions pursuant to the Revenue Code, e.g. returns under commercial terms.
As aforementioned, analysing whether or not the contract is considered a general sale of goods contract or a consignment contract that complies with the criteria set by the Director-General of the Revenue Department is a complex and detailed process, which requires a tax professional verify the issue of tax liability.
In conclusion, tax planning before proceeding with business operations is essential to avoid the penalty for incorrect issuance of tax invoices; civil penalties for incorrect tax payments of up to twice the amount of tax payable, plus a surcharge of 1.5% of the full amount of tax payable. In addition, there might be an additional risk of tax audits arising from tax refunds submitted in the wrong tax month.
This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions on this or on other areas of taxation law, please do not hesitate to contact our tax team.
*1 Subjected to Section 78/3 of the Revenue Code, the sale of incorporeal goods, provision of services through automatic machines or the sale of goods for which the payment is made by credit cards or by other means of a similar nature.