With the increasing trend of electronic commerce, the use of prepaid vouchers and gift cards has increased exponentially not only in B2C transactions but also in B2B transactions. Vouchers are instruments which are redeemable on its face value against supply of goods or services. For example, multi-brand retailers supply gift cards to its customers which can be redeemed against purchase of merchandise of their brand of value equal to the face value as printed on such gift card.
In the erstwhile indirect taxation regime, there was confusion on taxability of vouchers under VAT/Service tax law. In case of Sodexo Coupons – 2015-TIOL-293-SC-MISC Hon’ble Supreme Court has overruled the judgment of Bombay High Court which had classified the coupons under the domain of goods inviting VAT and Local body tax (LBT).
Under GST regime, the intention of law makers seems to be to levy tax on vouchers, as there are provisions in the law which define vouchers, point of taxation thereof and other aspects. It would do good to remember that GST is levied on supply of goods/services for a consideration. The questions which arise are whether voucher can be considered as goods/services[taxable to GST] or merely an actionable claim or a means of payment[excluded from tax levy].
There has been spate of Advance rulings under GST with contradictory views expressed on taxability of vouchers, in the past. In case of M/s Loyalty Solutions and Research Private limited [2018-TIOL-100-AAR-GST], it was held that “the reward points earned by the end customers for purchase of products of “partners” to loyalty programme are indeed “actionable claim”. But no reasoning was given for concluding reward points to be actionable claim. Advance rulings are only applicable to the assessee who has applied for and got the ruling and the concerned jurisdictional officer and the same cannot be made applicable to other registered persons.
In the latest decision of Karnataka High Court in M/s Premier Sales Promotion Pvt Limited v. Union of India [Writ Petition No. 5569 of 2022 (T-RES)] has set aside and quashed the order passed by AAAR, Karnataka, which upheld the ruling passed by AAR, Karnataka, ruling that the vouchers are leviable to tax as goods. The Hon’ble High Court has held that the issuance of vouchers is similar to pre-deposit instruments, which have no inherent value of their own and therefore, it does not fall under the category of supply of goods or services. Hence, vouchers being neither goods nor services, are exempted from the levy of tax.
In this backdrop the paperwriters have analysed the tax implications of vouchers in light of this latest decision.
Analysis of voucher under GST
GST is levied on supply of goods/services for a consideration. In this context we examine what is voucher, whether it can be considered as goods/service/actionable claim/means of payment and whether it can be taxable under GST at all.
- Definition of voucher: 'Voucher' is an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument[section 2(118).
- Whether voucher is a goods or service: For this we examine meaning of term goods and services under GST. The term “goods” is defined in section 2(52) of the CGST Act, 2017 to mean every kind of movable property other than money and securities but includes actionable claim……; From this it appears that actionable claim is included in definition of goods.
- Hon’ble Supreme Court in Sodexo supra has decided that these so called food vouchers for employees which would also be used at some designated stores for buying of goods are not ‘goods’ and VAT and LBT cannot be levied. Hon’ble Supreme Court also made it clear that vouchers are merely “payment instruments” and not ‘goods’ and they become taxable only when they are redeemed.
- The term “service” is defined in section 2(102) of the CGST Act, 2017 to mean anything other than goods, money and securities ... The definition of goods/services it excludes money.
- The department may dispute that vouchers are categorised as “goods”. In paperwriter view this may not be correct as the definition of the term “voucher” makes it clear that it is an instrument accepted as consideration for the supply of goods and service.
- Whether vouchers are actionable claim? The term “actionable claim” is defined in section 2(1) of the CGST Act, 2017 and it has reference to section 3 of the Transfer Of Property Act, 1882 which means the following:
- a claim to any debt, other than a debt secured by mortgage of immoveable property or
- by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
- The term “debt” is not defined in GST law. The term “debt” in P. Ramanatha Aiyer’s advanced law lexicon, debt means:
A sum of money due from one person to another. A debt exists when a certain sum of money is owing from one person to another 'Debt' denotes not only the Obligation of the debtor to pay, but also the right of the creditor to receive and enforce payment . (EARL JOWITT in his Dictionary of English Law).
Consequently, vouchers or gift card could be said to be a claim to any debt, other than a debt secured by mortgage of immoveable property.
- Clause 6 of Schedule III covers Actionable claims, other than lottery, betting and gambling consequently, such actionable claims are excluded from the scope of supply. Therefore a view is possible that GST is not leviable on vouchers as they are actionable claims and excluded from the ambit of GST as the same is covered under Schedule III. Such stand has to be judicially tested and there is no clarity as on date in this regard that voucher is actionable claim under GST from Courts of higher jurisdicature.
- Whether voucher is money and hence excluded from definition of goods and services?
- Definition of money: “money” defined under section 2(75) of CGST Act, 2017, means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination ……;
- Money is specifically excluded from the definition of both the terms “goods” and “services” in GST. Thereby, transaction in money is not leviable to GST. The term “money” includes other instruments recognised by the RBI when used as a consideration to settle an obligation or exchange with the Indian legal tender of another denomination.
- Section 4 of Payment and Settlement System Act, 2007 provides that no person other than RBI shall commence or operate a payment system except under and in accordance with an authorization issued by RBI under the provisions of PSS Act. Section 7 of PSS Act grants power to RBI to issue an authorization for operating payment system.
- Pre-paid instruments (“PPI”) are one of the recognised mode of payment and settlement under Payment and Settlement System Act, 2007. PPI are instruments that facilitate purchase of goods and services against the value stored on these instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid payment instruments can be issued in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.
- PPIs that can be issued in India are classified under three types viz. (i) Closed System PPIs, (ii) Semi-closed System PPIs, and (iii) Open System PPIs.
- Closed System PPIs: These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only and do not permit cash withdrawal. As these instruments cannot be used for payments or settlement for third party services, the issuance and operation of such instruments is not classified as payment systems requiring approval / authorisation by the RBI.
- Semi-closed System PPIs: These PPIs are used for purchase of goods and services, including financial services, remittance facilities at identified merchants/ establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. These instruments do not permit cash withdrawal, irrespective of whether they are issued by banks or non-banks.
- Open System PPIs: These PPIs are issued only by banks and are used at any merchant for purchase of goods and services, including financial services, remittance facilities, etc. Banks issuing such PPIs shall also facilitate cash withdrawal at ATMs / Point of Sale (PoS) / Business Correspondents (BCs).
- Once the issued vouchers are recognized/authorised by RBI, then it would get covered under the definition of “Money” under section 2(75) of CGST Act.
- Therefore, pre-paid payment instruments which have been granted authorization in terms of Section 7 of PSS Act for operation of payment systems by issuance of their vouchers in the form of gift cards would not be leviable to GST as it would be considered as “transaction in money” and excluded from GST levy.
- In addition, the definition of ‘vouchers’ as defined under the CGST Act, makes it clear that vouchers are mere instruments accepted as consideration for supply of goods or services. They have no inherent value of their own. As vouchers are considered as instruments, they would fall under the definition of ‘money’, defined under GST. The GST Act excludes ‘money’ from the definition of goods and service and therefore not leviable to tax.
- Similarly in M/s Kalyan Jewellers (AAAR/11/2021) it is observed: 7.6 …..Voucher being an instrument used as a consideration to settle application, is a type of money, and as long as such instrument is recognised by Reserve Bank of India. Even if such voucher is not recognised by Reserve Bank of India, it would still form a means of payment of consideration, though it does not constitute money under the above definition…. “7.9. …… Voucher per se is neither a goods not a service. It is a means of payment of consideration.”
- Further GST may not be applicable to be paid at the time of issuing the voucher/gift card. The actual product/service against which the voucher would be utilised would anyway suffer the applicable tax under GST.
Relevant latest Karnataka HC decision under GST
The Hon’ble Karnataka High Court in M/s Premier Sales Promotion Pvt Limited v. Union of India [Writ Petition No. 5569 of 2022 (T-RES)] has set aside and quashed the order passed by AAAR, Karnataka, which upheld the ruling passed by AAR, Karnataka, ruling that the vouchers are leviable to tax as goods.
Facts and issue:
Undisputed facts of the case are, assessee is a Company engaged in the transaction of procuring PPIs of Gift Vouchers, Cash Back Vouchers and E-Vouchers from the issuers and supplying them to its clients for specified face value. The clients issue them to their employees in the form of incentive or to other beneficiaries under promotional schemes for use as consideration for purchase of goods or services or both as specified therein. Assessee receives orders for supply of evouchers wherein the assessee sources e-vouchers for such clients as per the orders received and acts as an intermediary between the assessee and the supplier of e-vouchers.
The argument in substance is, the voucher, when accepted shall be consideration or part-consideration for supply of goods or services or both and the voucher itself cannot be treated as goods or services.
The question that falls for consideration is, whether in the facts of this case, vouchers themselves are chargeable to tax at the time of supply or chargeable when goods and services are redeemed?
Analysis and decision
- Petitioners contention is, ‘vouchers’ are recognised by the RBI as ‘payment instrument’ to be accepted as consideration or part consideration for supply of goods and services.
- However, the vouchers themselves cannot be treated as ‘goods or services’ for the purpose of levy of GST. When the vouchers do not have any intrinsic value and they represent the value of future goods or services to be redeemed, the levy of tax on the vouchers is without authority of law and it also amounts to multiple levy of taxes.
- The definition of ‘vouchers’ as defined under the CGST Act, makes it clear that vouchers are mere instruments accepted as consideration for supply of goods or services. They have no inherent value of their own. As vouchers are considered as instruments, they would fall under the definition of ‘money’, defined under CGST Act. The CGST Act excludes ‘money’ from the definition of goods and service and therefore not leviable to tax.
- In Union of India Vs. Delhi Chit Fund Association, the Delhi High Court has held thus: “10. A mere transaction in money represents the gross value of the transaction. But what is chargeable to service tax is not the transaction in money itself since it can by no means be considered as a service.”
- It is clear from the above authority that mere transaction of money or actionable claim, no services are involved and therefore no tax is leviable.
- In Sodexo SVC India Pvt. Ltd (supra), relied upon by the assessee, the Apex Court held as follows: “15. We have already taken note of the nature of the transaction. After going through the relevant provisions and the principle laid down in various judgments explaining the features of 'services' and 'goods', we are of the opinion that the Sodexo Meal Vouchers cannot be treated as 'goods' for the purpose of levy of Octroi or LBT…” (Emphasis Supplied)
It is not in dispute that the vouchers involved in the instant petition are semi-closed PPIs in which the goods or services to be redeemed are not identified at the time of issuance. Vouchers are distributed to its employees or the customers which can be redeemed by them. These PPIs do not permit cash withdrawal, irrespective of whether they are issued by banks or non-banking Companies and they can be issued only with the prior approval of RBI.
The value printed on the form can be transacted only at the time of redemption of the voucher and not at the time of delivery of vouchers to assessee’s client. Therefore, the issuance of vouchers is similar to pre-deposit and not supply of goods or services. Hence, vouchers are neither goods nor services and therefore cannot be taxed. In view of the above discussion, this writ petition is allowed.
Impact of the Decision:
There was a lot of confusion in the voucher industry in the absence of any clarity under the GST law on taxability of vouchers. However, the above High Court decision has brought much required clarity. This decision has strengthened the stance which had been taken across the large segments of the voucher industry that voucher is only a means of payment of consideration towards supply of goods/services and not leviable to GST as it is not at all a supply of goods/services.
The decision of the High Court is a great relief to the entire voucher industry as the High Court has rightly held that GST is not leviable on issuance of voucher. Further, this decision it is hoped would support against various disputes raised by the department demanding GST on vouchers.
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