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Understanding GST treatment of gift cards and vouchers

In the third episode of the Indirect Tax Insights podcast, Indirect Tax Partners Bipin Sapra, Partner - Leader, Indirect Tax Economic Policy, EY India and Jayashree Parthasarathy, Partner, Indirect Tax, EY India discuss the complexities surrounding the taxation of gift cards and vouchers and explain the recent clarifications (Circular No. 243/37/2024-GST dated 31 December 2024) and amendments in this regard. They break down the different components to take a closer look at the taxability of margins earned from gift cards and vouchers as well as breakage income. They draw a distinction between principal-to-principal (P2P) and principal-to-agent (P2A) models in addition to general and specific vouchers Understanding the clarifications and amendments will help reduce disputes regarding the taxation of vouchers.

Key takeaways

Businesses need to review their contractual agreements to comply with the new tax provisions on gift cards and vouchers.
GST Circular clarifies previous ambiguities, stating gift cards are not taxable as goods under GST.
Margins earned from trading gift cards are subject to GST in P2A model, however breakage income is not taxable without an actual supply or redemption.

The government has recognized a very important principle, that the tax (on gifts cards and vouchers) will be paid and it is only an issue of time. This should not cause disputes. The clarification mitigates unwarranted disputes.

Jayashree Parthasarathy

Partner, Indirect Tax, EY India

For your convenience, a full text transcript of this podcast is available on the link below:

Bipin Sapra: Welcome to our Indirect Tax Insights podcast. My name is Bipin Sapra and I lead the indirect tax economic policy at EY India. Today, I will be your host for this episode, and we will delve into the intricacies of taxation of gift cards or vouchers. Joining us today is Jayashree Parthasarathy, a seasoned tax consultant and a highly regarded tax Partner at EY India, leading knowledge and solutions vertical. She has close to 25 years of experience in the field and both I and Jayashree have worked together on a number of advocacy assignments. In the voucher industry, we have been presenting their issues for more than two years resulting in bringing out the circular and some changes and amendments which would help the industry pay the right amount of taxes and bring clarity in the way these issues are going to be taxed.

Jayashree Parthasarathy: Thank you so much, Bipin, for having me. It is a pleasure to be here and discuss a topic that is very close to my heart with our listeners today.

Bipin Sapra: Let us set the stage by understanding the background of this issue, Jayashree. Historically, vouchers have not been taxable when they are issued; taxes are levied at the stage of the redemption, the goods or services redeemed.

That was the practice and it was followed in the service tax regime and globally also, except in some jurisdictions where specific laws have been made to tax these vouchers.

The voucher industry, however, had to lobby hard for certain clarifications to be issued with respect to its taxation.

So, what has been the controversy and changes the clarifications brought in to tackle the same?

Jayashree, can you elaborate on that issue and what has been the effort to bring about this clarification?

Jayashree Parthasarathy: Sure. Bipin, thanks for setting the context. Historically, under the pre-GST regime, vouchers were treated as what we would call akin to an actionable claim, basically an instrument which allows you to redeem certain goods or services.

Today, if we look at vouchers or gift cards as a concept — we are probably familiar with what are called gift prepaid instruments (PPIs) — these are essentially RBI regulated instruments that can be used in lieu of cash or credit to buy goods or services. Some of these gift PPIs are regulated by the RBI. Others are not. But essentially what they do is they allow you to go and buy goods or services using them, almost like a currency.

So far, the controversy really under GST has been that are we meant to treat these vouchers themselves as goods or services? Or can we take a position that these are effectively like money or actionable claims and therefore not liable?

In that context, we have had the good fortune of having certain High Court rulings, which have come in to clarify that the cards or the vouchers themselves are not really goods, rendering them liable to be taxed.

The largest of the issues really has been when a distributor or issuer or reseller trades or supplies these vouchers or gift PPI, as we call them, on a principal-to-principal basis and earns a trading margin. Is that margin supposed to be offered to GST, almost like a commission? That has been the largest of these issues the industry has been grappling with on account of certain ongoing investigations, disputes, and demands, etc.

The third of these issues has been what should be the correct and appropriate tax treatment of breakage, which is nothing but income that the issuer of the gift cards or the PPIs recognize, to the extent of the unredeemed portion of the gift card itself, which again gets recognized belatedly basis RBI mandate. But the dispute arose as to whether this recognition of income itself renders it to be a supply liable to GST.

So, in summary, gift cards themselves are taxable as goods. Second is the margin earned on trading of gift cards taxable as a taxable supply. And third is recognition of breakage income taxable. These were largely the controversies that the industry was trying to get resolved.

Bipin Sapra: Thank you for explaining how the vouchers work and what were the issues around vouchers which prompted the advocacy and representation with the GST Council. Can you explain to the listeners what the issues are, what is in the circular issued, and how does it take care of the taxation of vouchers and the various types of vouchers, which is the P2P and the P2A vouchers, their taxability?

Jayashree Parthasarathy: I will start with your first question, about the fact that the industry itself operates under two different and distinct models. One, like I mentioned earlier, we have a P2P model where there is a buy-sell of the voucher and each intermediary in the transaction, who is usually a reseller, earns a trading margin.

The controversy really has been whether this trading margin needs to be offered to GST. And typically, if you look at the basic principles, which we may be familiar with, there are GST-exempt supplies and non-taxable supplies, which means that a particular product or service may be exempt or not taxable because it is not under GST.

We do not really have a mechanism under the GST law to carve out the margin earned and tax it. The basic principle being that if something is not taxable, then any income earned out of that, whether as a trade margin or a discount or by any other name, should ordinarily not be taxable.

The circular really articulates that principle to call out that in a P2P arrangement, it is a buy-sell of vouchers, because the vouchers themselves are not taxable till they are redeemed, anything earned out of that distribution, on that buy-sell as a trade margin, should not be taxable. To my mind as well, that is the right position.

The circular goes on to clarify that if the commercial arrangement and contractual obligations between the parties are such that there is a distribution service that is rendered in the capacity of, let us say, a sales agent, then to that extent, the commission earned on that distribution service needs to be offered to tax. This, again, has largely been the way in which the industry has been operating as well.

To summarize and simplify, P2P trade margin is not liable, just as it is not liable with respect to exempt supplies. Whereas if it is a commission I am earning on the distribution of an exempted product or service, I would need to pay GST and that principle will equally apply to vouchers as well.

Bipin Sapra: So, Jayashree, we understand how board (CBIC) has clarified the taxation on vouchers and how it will set to rest the issues which were there. Can you also explain how the taxation of breakage income would work and how the clarification will take care of the issues around taxation of breakage income?

Jayashree Parthasarathy: We move to the larger issue of breakage. Breakage is effectively an accounting entry which issuing companies of vouchers pass when the voucher or a part of it remains unredeemed. When a voucher is typically issued before, as you are aware, the companies will pass an entry recognizing a liability, pending the redemption of that voucher. When the redemption does not happen, that liability will need to be reversed. And therefore, from an accounting standpoint, an income is recognized.

But this does not mean that a supply has happened. In fact, breakage income is effectively earned only when there is no supply, no redemption, no article or goods or services being supplied. Again, rightly so, the circular goes on to clarify that in the absence of a supply, in the absence of a redemption, mere recognition of an income by way of an accounting entry, which is called breakage in industry terms, should not be taxable.

If you look at the principles that the circular articulates, it is broadly aligned with how most international jurisdictions, save certain exceptions, also treat breakage income, margin commission, etc.

Overall, I would say, it is a much-welcomed circular which provides a lot of clarity and certainty with respect to tax treatment of vouchers.

Bipin Sapra: Thanks, Jayashree for explaining about the circular issued by the GST Council. What the GST Council has also done is that it has gone ahead and amended the law to delete provisions that seek to differentiate the time of taxation of general vouchers and specific vouchers. Can you explain to our listeners, what general and specific vouchers are and how they have been treated till now by the GST law?

Jayashree Parthasarathy: This is a very interesting and good question. The easiest and simplest example of a general voucher would be a voucher which, at the time it is issued, neither the supplier nor the recipient knows what is going to be redeemed, how and where. An easy example would be a voucher that an e-commerce portal issues, which is redeemable against any goods or services listed on the portal or supplied by multiple different vendors.

A different example could be a brand which deals with multiple products, and at the time of issuance, there is no visibility on what product will be redeemed against the voucher.

A more nuanced example could be a gold jewellery store brand that issues a voucher which the customer can redeem against any store pan-India, across any location. While there is visibility on the product, there is no visibility on where the voucher will be redeemed and what will, therefore, be the place of supply.

These are all typically treated as general vouchers. So far, from a time of supply standpoint, tax would not apply at the stage of issuance.

It gets a little more complicated where we have vouchers issued by companies, let us say, like OTT platforms which have a single GST registration. You know who the supplier is or where the supply is from. You know what the product is, an entertainment or a TV package. But what we do not know is where it is going to be redeemed. So, these too, to my mind, ordinarily should be treated as a general voucher because we do not know where the place of supply or redemption is really going to be.

Some of these were causing a bit of a confusion. Given that a lot of parameters of the supply were known upfront at the time of issuance, and there was a bit of divergence in the industry practices with that, perhaps that is the reason why the government thought it fit to take a relook at the categorization of vouchers themselves as general and specific.

Coming to a specific voucher, perhaps the simplest example is a voucher for a salon around the corner from my house, issued to me for a specific treatment. Here, I know everything. Who the issuer is; we know it is going to be a particular type of service, which is taxable at a particular rate; and which will only be available at that particular location. So, we can definitely treat this as a specific voucher. And the right tax treatment is for tax to be paid at the time of issuance as well.

Bipin, I will now come to your question on did we really need this kind of an amendment? I guess the government was looking to not create further disputes and controversy on whether a particular voucher is a general one or specific one. Is it taxable at the stage of issuance or redemption across the chain, etc. To that extent, I feel the proposed amendment, which seeks to do away with the differentiation between general and specific vouchers, is a good one.

It will bring in a lot of clarity and certainty to transactions, where the entire industry will now know that tax is to be paid only at the stage of redemption, irrespective of the type of voucher.

I think the government has recognized a very important principle, which is that the tax will anyway get paid. It is only an issue of time and it should ideally not cause disputes with respect to when tax is to be paid. It kind of mitigates unwarranted disputes. To that extent, I feel it is a very proactive and a good move on the government's part.

India is effectively taking a slightly different position from most other countries, which continue to have specific vouchers being taxed at the time of issuance and general vouchers only at the stage of redemption.

Bipin Sapra: Thank you, Jayashree, for explaining this so lucidly for the listeners. Do you see any flip side to it?

Jayashree Parthasarathy: Again, a great question. If we go back to the clarification, it clearly says P2P is not taxable at all while P2A is taxable.

The first thing a lot of businesses looking at voucher’s issuance or distribution, really need to do is take a relook at their contractual arrangements to ensure that there are clear delineations between any P2P arrangements and any P2A arrangements they have because the government will be closely looking at contractual agreements, roles and responsibilities, and terms and conditions to really try and see whether the arrangement is P2P for a full exemption to be availed, or a full non-taxation to be availed, to put it differently. Or, whether it is more like a P2A arrangement where at least the commission needs to be offered to tax.

The second point really is that there has been divergence in practice where some companies have been paying tax on specific vouchers, through every point in supply. They will probably need to take a relook at their compliance and tax processes with respect to the end point retail outlet alone now probably charging a tax, with tax not being charged on every supply.

And lastly, of course, it is great when there is a clarification which says that something is not taxable. On the flip side, it becomes important to also analyze what restrictions, if any, come by with respect to some of these companies that are engaged in the business of distribution of vouchers, on the input credits side. Today, we really do not have a provision in the GST law that restricts credits for actionable claims as such.

The circular thankfully calls out vouchers to either be money or actionable claims. But that is again something that I guess businesses will really need to look at and gear up for, from our input tax credit scrutiny standpoint.

These are some of the issues that remain, but we should definitely be thankful for the larger issues of taxation having been resolved through the circular as well as the amendment.

Bipin Sapra: That is great insight, Jayashree. Thank you for sharing your expertise with us today.

Jayashree Parthasarathy: My pleasure, Bipin. Thanks for having me. I hope the discussion was interesting as well as insightful.

Bipin Sapra: It indeed was. A big thanks to our listeners for tuning in to this episode of the IDT insights podcast.

We hope you found this discussion useful and enlightening. Do not forget to subscribe to our podcast for more insights on taxation and until next time, I am Bipin Sapra signing off from this edition. Thank you.

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Episode 03

Duration

17m 47s

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Understanding GST treatment of gift cards and vouchers

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