The Goods and Services Tax (GST) landscape is ever-evolving, and one of the areas of concern that has often raised questions is the treatment of vouchers. Ambiguity regarding whether transactions in vouchers are considered supply of goods or services, the applicability of GST on trading of vouchers by intermediaries, and the taxability of unredeemed vouchers (commonly known as breakage) has been a source of confusion for businesses and tax officials alike. To address these issues and ensure consistency in interpretation and implementation, the Central Board of Indirect Taxes and Customs (CBIC) has recently issued a detailed clarification.
This article explores the CBIC’s clarification and provides a comprehensive understanding of the GST treatment of vouchers, supported by relevant examples and legal references.
Are Transactions in Vouchers a Supply of Goods or Services?
One of the fundamental issues clarified by the CBIC relates to whether vouchers are categorized as a supply of goods or services. According to the GST law, “goods” include every kind of movable property other than money and securities, while “services” encompass activities other than goods, money, or securities. The term “voucher,” as per Section 2(118) of the Central Goods and Services Tax Act (CGST Act), refers to an instrument that obligates acceptance as consideration or part consideration for the supply of goods or services, where the specifics of the supply are indicated on the voucher itself or in associated documentation.
In certain cases, vouchers function as pre-paid instruments regulated by the Reserve Bank of India (RBI) under the Payment and Settlement Act, 2007. When a voucher is recognized by the RBI and used as a payment instrument to settle an obligation, it falls under the definition of “money.” Since the GST law explicitly excludes money from the definition of both goods and services, such vouchers are not considered a supply under GST.
Variety of Vouchers
However, not all vouchers fall into the category of money. For example, vouchers that are not recognized as pre-paid instruments by the RBI are treated differently. These vouchers represent an obligation on the supplier to provide specified goods or services in exchange for the voucher. As such, they qualify as “actionable claims” under Section 3 of the Transfer of Property Act, 1882. Actionable claims, other than specified actionable claims (such as betting, gambling, and lottery), are treated as neither goods nor services under GST, as per Schedule III of the CGST Act.
To summarize, the CBIC clarified that transactions in vouchers, irrespective of whether they qualify as money or actionable claims, do not constitute a supply of goods or services. However, the underlying supply of goods or services for which the voucher is redeemed may be taxable under GST.
GST Treatment of Vouchers Distributed by Intermediaries
The clarification also addressed the GST implications of vouchers distributed through intermediaries, such as distributors, sub-distributors, or agents. Broadly, two models of distribution were identified:
1. Distribution on a Principal-to-Principal (P2P) Basis
Under this model, intermediaries purchase vouchers directly from the issuer at a discounted rate and then sell them to sub-distributors, corporate clients, or end consumers, earning a margin as profit. In such cases, intermediaries act independently and retain full control over the buying and selling process.
Example: Consider a distributor who purchases vouchers worth ₹10,000 at a discounted rate of ₹9,000 and resells them for ₹10,000, earning a margin of ₹1,000. Since the GST law treats vouchers as neither goods nor services, the mere trading of vouchers in this case does not attract GST.
2. Distribution on a Commission/Agency Basis
In this model, intermediaries act as agents of the voucher issuer. They distribute the vouchers in exchange for a commission or fee, which may involve additional obligations such as marketing and promotion. The commission or fee charged by the intermediary for their service is taxable under GST, as it constitutes a supply of services.
Example: An agent who markets and distributes vouchers on behalf of the issuer and charges a 5% commission would need to pay GST on the commission amount, as it is considered a taxable service under GST.
Unredeemed Vouchers: The Taxability of Breakage
Another critical issue clarified by the CBIC pertains to unredeemed vouchers, often referred to as breakage. These are vouchers that remain unused by the holder after their validity period expires. The CBIC clarified that breakage does not represent a supply of goods or services by the voucher issuer.
Example: If a retailer issues gift vouchers worth ₹5,000 and ₹500 worth of vouchers remain unredeemed after the expiry date, the unredeemed amount is not subject to GST. This is because the GST liability arises only at the time of redemption, when the underlying supply of goods or services is made.
Practical Implications for Businesses
The CBIC’s clarification provides much-needed relief to businesses and intermediaries operating in the voucher industry. By distinguishing between different types of vouchers and distribution models, the guidelines ensure that businesses can comply with GST laws more effectively and avoid unnecessary litigation.
However, businesses must maintain clear records of transactions involving vouchers, including details of their issuance, distribution, and redemption. Proper documentation is essential to determine whether GST is applicable on the underlying supply and to ensure compliance with the provisions of the GST law.
Conclusion
The recent clarification by the CBIC brings clarity to the GST treatment of vouchers, addressing long-standing ambiguities and streamlining compliance requirements for businesses. By differentiating between vouchers that qualify as money, actionable claims, or taxable services, the guidelines provide a clear framework for the voucher industry.
This development is a significant step towards ensuring consistency and uniformity in GST implementation, benefiting both businesses and tax authorities alike. As the GST ecosystem continues to evolve, such clarifications play a crucial role in fostering transparency and reducing litigation, ultimately contributing to the ease of doing business in India.