Voucher Taxation under GST: Clearing the Fog of Ambiguity

Imagine receiving a voucher for your favorite coffee shop-a simple card or code promising a hot cup of coffee. It's a straightforward transaction, right? However, beneath the surface, the taxation of vouchers under the Goods and Services Tax (GST) framework is anything but simple. Vouchers-whether gift cards, prepaid coupons, or e-vouchers-are commonly used, but how are they taxed?

Vouchers play an integral role in today’s economy, facilitating cashless transactions and customer loyalty programs. Yet, their taxation under GST remains ambiguous, sparking ongoing debates and differing interpretations in the legal world. This article seeks to untangle the complexities of voucher transactions under GST, exploring how they fit into the broader compliance framework.

Key questions arise:

• Are vouchers considered as goods or services?

• Is GST applicable to trading vouchers?

• What happens to GST on unredeemed vouchers?

These questions have led to varying interpretations, resulting in legal ambiguity and disputes.

Pre-GST Era: The Ambiguous Taxability of Vouchers

During the erstwhile regime, the Supreme Court judgment in Sodexo SVC India Pvt. Ltd. v. State of Maharashtra, decided on 09-12-2015 (2015(12)LCX0005) held that vouchers, like Sodexo meal vouchers are not “goods” and, therefore, not subject to VAT or Local Body Tax (LBT). The Supreme Court held that such vouchers are merely 'payment instruments' and not 'goods' and they become taxable only when such vouchers are redeemed.

Similarly, in Idea Mobile Communication Ltd. v. Commissioner of Central Excise & Customs, decided on 04.08.2011 (2011(08)LCX0013),  the Supreme Court held that dominant position of the transaction is to provide services and not to sell the material i.e., SIM Cards which on its own but without the service would hardly have any value at all.

GST and the Emerging Debate

Under GST, lawmakers attempted to reduce ambiguity by defining vouchers and specifying their point of taxation. Yet, questions remain about their classification:

• Are vouchers taxable as goods or services?

• Are they actionable claims or instruments of payment excluded from GST?

The debate has unfolded across several Advance Rulings with differing interpretations:

➣ Tamil Nadu AAAR in M/s Kalyan Jewellers India Ltd., decided on 30/03/2021 (2021(03)LCX0234(AAAR)) : The authority ruled that vouchers are instruments of consideration for future supply, not goods or services, the same is not classifiable separately but only the supply associated with the voucher is classifiable according to the nature of the goods or services supplied in exchange of the voucher earlier issued to the customer.

➣ Whereas, AAAR of Karnataka has upheld the AAR order in the case of M/s Premier Sales Promotion Pvt. Ltd. dated 22/12/2021(2021(12)LCX0117(AAAR))wherein it was concluded that the supply of vouchers by the Appellant is a supply of goods in terms of Section 7 of the CGST Act and not actionable claims.

But recently, the High Court of Karnataka, overturned the said decision of Karnataka AAAR in the writ petition filed by M/s Premier Sales Promotion Pvt. Ltd. [decided on 16/01/2023 (2023(01)LCX0091)] and held that as the transaction between assessee and his clients is procurement of printed form, which are like currency; and value printed on the form can be transacted only at the time of redemption. The High Court analyzed the definition of 'Money' and 'Vouchers' as provided under the CGST Act and held that vouchers do not attract any tax since vouchers qualified as instruments, falling under the purview of 'money' and consequently excluded from the definition of 'goods' and 'service'. Therefore, issuance of voucher is similar to pre-deposit and not supply of a good/service; hence, it cannot be taxed under GST. Consequently, such transactions fall outside the GST ambit.

The High Court’s ruling has influenced subsequent cases, including the denial of ITC claims on vouchers in M/s Myntra Designs Pvt. Ltd., decided on 24/02/2023 (2023(02)LCX0048(AAAR)) by Karnataka AAAR, emphasizing that if vouchers are not taxable, ITC eligibility cannot arise.

To address and resolve this, the Board recently issued Circular No. 243/37/2024-GST on December 31, 2024.It provides clarity on:

1. Classification of voucher transactions as goods or services.

2. GST treatment for distributors, sub-distributors, and agents.

3. GST implications for associated services like advertising, marketing, and customization.

4. Treatment of unredeemed vouchers (breakage).

1. Are Transactions in Vouchers a Supply of Goods or Services?

• A “voucher” is defined u/s 2(118) of the CGST Act, as an instrument that obligates acceptance as full or partial consideration for a supply of goods or services or both. It specifies the goods, services, or suppliers involved, either on the instrument itself or in related documentation, including the terms and conditions of use of such instrument. Essentially, a voucher serves as a payment instrument that creates an obligation on the supplier to accept it as part of the payment for goods and/or services.

• In India, the issuance of payment instruments, including pre-paid instruments, is regulated by the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007, along with its Master Directions and relevant notifications, circulars, or communications issued from time to time.

• PPIs, as defined by the RBI, allow the purchase of goods or services against stored value. This value is preloaded by the holder through cash, bank transfers, or credit cards. PPIs can take the form of cards, wallets, or similar instruments.

• Section 2(75) of the CGST Act defines "money" to include instruments recognized by the RBI used to settle obligations.

• On combined reading of the definition of "voucher" as per section 2(118) of the CGST Act, along with definition of "money" as per section 2(75) of the CGST Act and the description of "pre-paid instruments" given by RBI, it emerges that where the voucher is covered as a pre-paid instrument recognized by the RBI and is used as a consideration to settle an obligation, then in such cases, the voucher will fall under the definition of "money".

Two scenarios emerge:

i. When Vouchers Qualify as "Money": If the voucher is a pre-paid instrument (PPI) recognized by the Reserve Bank of India (RBI), it is treated as "money," which is excluded from the definitions of goods and services. In such cases, transactions in vouchers are neither a supply of goods nor services (per Sections 2(52) and 2(102)).

ii. When Vouchers Do Not Qualify as "Money": If a voucher is not recognized as a PPI by the RBI, it may create an obligation for the supplier to accept it as consideration. Such vouchers are categorized as actionable claims under Section 2(1) of the CGST Act and Section 3 of the Transfer of Property Act, 1882. Under Schedule III of the CGST Act, actionable claims (except those related to betting, gambling, etc.) are treated neither as goods nor services. Hence, transactions in such vouchers are also outside the scope of GST.

Therefore, it is clarified that transactions in vouchers, whether they qualify as "money" or as actionable claims, are not treated as a supply of goods or services under GST. However, the underlying goods or services for which the vouchers are redeemed may be taxable under GST.

The treatment depends on the distribution model:

i. Principal-to-Principal (P2P) Basis: In this model, distributors or dealers purchase vouchers from the issuer at a discounted rate and sell them to sub-distributors, corporates, or end customers for a profit. Distributors have ownership and full control over the vouchers from purchase to final sale. When distributors purchase vouchers at a discount and resell them, their margin constitutes trading income. Since vouchers are not goods or services, such trading of vouchers is not subject to GST.

ii. Commission/Agency Basis: In this model, distributors or agents act as intermediaries between the voucher issuer and the end customer. These agents receive a commission or fee for their services. As agents do not own the vouchers and are remunerated through commission/fees, this is considered a supply of services. GST is applicable on the commission earned.

Services like advertisement, co-branding, customization, or technology support provided by distributors or third parties to voucher issuers are treated as taxable services. The service fee/charge/affiliate charge (or any other amount paid for such additional services) will be subject to GST at the applicable rate.

Unredeemed vouchers present unique challenges. Unredeemed vouchers (breakage) refer to vouchers that remain unused or unredeemed after their expiry period. Businesses typically make book adjustments and account for the value of unredeemed vouchers in their income statement, referred to as "breakage." The question arises about whether the amount attributed to unredeemed vouchers can be considered as "consideration" for a taxable supply under GST.

Since no underlying goods or services are supplied for unredeemed vouchers, they are not considered a taxable supply. Consequently, the value attributed to breakage is not subject to GST. This aligns with the principle that GST applies only to actual supplies of goods or services. Further, as no goods or services are provided in the case of unredeemed vouchers, the amount retained for breakage cannot be considered consideration for a supply.

Circular No. 178/10/2022-GST (dated 03.08.2022) clarifies that there must be an express or implied agreement to supply goods or services in exchange for consideration. Since no such agreement exists between the voucher issuer and the redeemer for payment in the event of unredeemed vouchers (breakage), the amount from breakage cannot be considered as "consideration" for a taxable supply. As there is no supply of goods or services, no GST is payable on the breakage amount.

Transactions in vouchers are neither treated as a supply of goods nor supply of services under GST. However, the underlying goods or services for which the vouchers are redeemed may be taxable under GST. Amount from unredeemed vouchers cannot be considered as "consideration" for a taxable supply. As there is no supply of goods or services, no GST is payable on the breakage amount. This clarification brings much-needed consistency to the treatment of vouchers under GST and provides a clearer framework for businesses navigating this complex area of taxation.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.