BACKGROUND AND ISSUE
Gift cards or gift vouchers are Pre-Paid Instruments (PPIs) that are redeemable basis their face value against supply of goods or services. Issuance gift cards/vouchers is governed and regulated by the Reserve Bank of India (RBI) vide Master Directions on Prepaid Payment Instruments in exercise of powers conferred on RBI under S.18 read with S.10(2) of the Payment and Settlement Systems Act, 2007. PPI’s can be classified into three categories, i) closed, ii) semi closed and iii) open system of PPIs.
The Karnataka Appellate Authority for Advance Ruling (AAAR) has recently, in the case of M/s Premier Sales Promotion Pvt Ltd., held that supply of vouchers, in the hands of the dealer who purchases and sells vouchers, is a supply of goods chargeable to GST @ 18%. This ruling is contrary to an earlier ruling of Tamil Nadu AAAR in M/s Kalyan Jewellers India Ltd., which held such supply to be neither supply of goods, nor of services. It is also contrary to the widely accepted position both in the previous Service Tax / Value Added Tax (VAT) regime as well as the present GST regime.
Similarly, in relation to “breakages”, Haryana AAAR in M/s Loyalty Solutions and Research Private Limited has held that the value of payback points forfeited on account of failure to redeem them within their validity period (breakage) by the end customers, would amount to consideration received in lieu of services provided to its clients and thus chargeable to GST.
NASSCOM SUBMISSION
In this regard, we have a representation to GST officials on January 31, 2022 to highlight our point of view on taxability of vouchers and breakage as follows:
No GST payable on buying and selling of vouchers
a) Interpretation adopted by AAAR is against established legal provisions
- Under the pre-GST era as well, gift cards / vouchers were taxed at the time of their redemption with the rate of tax being applied basis the goods/ services supplied against the voucher. Further, breakage has not been taxed in the absence of a corresponding supply of goods / services and specific recipient of a “supply”. It was a well-settled and largely undisputed position across States under the VAT/ service tax era.
- We understand that this treatment is similar in overseas jurisdictions such as European Union, Australia, UK, Ireland, amongst others, where VAT / GST is applied only at the time of redemption of voucher. Hence, current industry position is aligned to settled position in pre-GST era as well as international best practices.
b) AAAR ignores the principle that gift cards/ vouchers are essentially “money”
- The term “Money” is defined under S.2(75) of Central Goods and Services Tax Act, 2017 (CGST Act) as any instrument recognised by RBI when used as consideration to settle an obligation. Further, S. 2(118) defines “voucher” to mean an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both.
- On a conjoint reading of the above, it can be said that gift vouchers (i.e., PPIs which are recognised as payment instrument by RBI) which carry with them an inherent obligation to be consideration for supply, is essentially “Money”.
- A plain reading of S. 12(4) and S.13(4) of CGST Act also bring out the clear position that “vouchers” are liable to be taxed only at the final stage of redemption. Rule 32 of Central Goods and Services Tax Rules, 2017 (CGST Rules) provides that value of a token, voucher, coupon or a stamp (other than postage stamp) which is redeemable against supply of goods/ services/ both shall be equal to the money value of goods/ services/ both redeemable against such token, voucher, coupon, or stamp.
- Therefore, GST law does recognise that the taxability qua the vouchers is triggered only at the time when there is an underlying supply against the voucher.
- Also, the nature/character (including the inherent monetary value) of voucher, being an instrument recognised and regulated by RBI, remains the same through the supply chain. It does not change from being a pre-paid instrument (i.e., money) in the hands of the issuer to being goods in the hands of the distributor.
c) Erroneous conclusion of AAAR would result in double taxation
- The Ld. Karnataka AAAR has held in the case of Premier Sales Promotion Pvt Ltd. that buying and supplying of vouchers is liable to pay GST @ 18% on the premises that vouchers are goods in the hands of such supplier.6 While coming to the conclusion, it also held that time of supply has to be determined as per S.12(5) and 13(5) of CGST Act, i.e. where a periodical return has to be filed, time of supply will be the date on which such return is to be filed.
- If such an interpretation were to be adopted, then the essence of S.12(4) and S.13(4), which are specifically applicable to vouchers, would be lost and rendered redundant as it would have no or very restricted applicability. Further, if "vouchers” were to be treated as goods, then the same would result in tax being paid on the voucher as well as on goods/ services purchased through their redemption, which is not the intention of the law.
- As clearly provided in S. 12(4) and 13(4) of the CGST Act, unless the underlying supply in itself is known at the time issuance of vouchers, no tax liability should arise at the stage of their supply. GST is payable only at the stage of the vouchers’ redemption for goods or services.
- Basis the reading of definition of actionable claim under S.2(1) of CGST Act read with S.3 of Transfer of Property Act, 1882, it could be said that vouchers are akin to actionable claims, which are in nature of payment instruments.
- In terms of S.7 read with Schedule III of CGST Act, any activity or transaction in actionable claims (other than lottery, betting, and gambling) shall neither be treated as supply of goods nor services; Hence, vouchers (which are PPIs) are not goods or services, hence, not liable to GST.
- In summary, gift vouchers are certainly not “goods” that are liable to GST, per se. If gift vouchers are taxed other than in the hands of the actual supplier of goods / services and at their redemption, the same shall be contrary to express provisions of the Act and result in an anomalous situation of dual taxation.
No GST payable on breakage
- Recognition of breakage as income in books of accounts is merely an accounting adjustment in case gift card gets expired, and the bearer has no right to claim refund / or utilise the said amount. Pertinently, breakage recognised by the issuer of gift cards / vouchers in the books of accounts is not recovered separately from customers against provision of any services.
- Reference is also drawn to RBI’s Master Direction no. RBI/DPSS/2021-22/82 dated August 27, 2021 on PPIs. Clause 13.3 of the said document clearly specifies that a non-bank PPI issuer cannot transfer the outstanding balance to its Profit & Loss account for at least 3 years from the expiry date of PPI.
- This makes it clear that the gift voucher remains money equivalent till the time of re-statement in books of accounts. Post this timeline, it becomes a mere adjustment entry and does not result in any supply against such money. In other words, it is a write back of liabilities to Profit & Loss account.
- Since breakage is directly relatable to supply of gift cards to customers, which gets expired later, and not against provision of any goods or services to customers, the treatment of such revenue should be similar to that of a gift card/ voucher i.e., without GST. In other words, it could be said that the taxable event is not getting fulfilled, hence, not liable to GST.
REQUEST FOR CLARIFICATION
As part of our representation, we have requested GST officials to issue clarification that gift cards / vouchers are neither “goods” nor “services” and a “supply” involving gift cards or vouchers shall attract GST only at their stage of redemption, with the GST being determined basis the goods/ services being redeemed. Further, breakage pertaining to gift cards or gift vouchers will also not attract GST and appropriate instructions should be issued to the field formations to keep any proceedings (whether proposed or on-going) in abeyance till the time appropriate clarification is issued.
We hope you will find this update useful. We will keep you posted on further developments in this regard.
