These days, gift cards, e-vouchers, cash back vouchers, etc. (hereafter collectively referred to as “vouchers”) have become extremely popular because they provide flexibility of choice and convenience of purchase and use for both purchaser and recipient. Whether it’s a wedding anniversary gift for a friend, an award by an employer to an employee for good performance, or a promotional program by an organization, vouchers are quickly becoming a go-to choice. .
This ever-increasing demand for vouchers is met by companies sourcing vouchers from their issuers and supplying them to buyers. Until January 2023, the applicability of the Goods and Services Tax (GST) on these vouchers was a gray area. On the one hand, the government was of the view that the vouchers taxable under the GST Act specifically provide for the timing of the supply of goods and services in the case of the vouchers.
On the other hand, voucher trading companies believed that vouchers, being a form of payment, are neither goods nor services and therefore there can be no GST levied on their supply. The Karnataka High Court recently considered this issue and concluded conclusively that vouchers are exempt from GST levy.
In coming to the above conclusion, the High Court considered the nature of these vouchers. It has been observed that vouchers in these forms are nothing but semi-closed prepaid payment instruments (PPI), as recognized by the Reserve Bank of India (RBI). In other words, vouchers are like a currency or a pre-deposit because they represent the value of future goods or services to be exchanged.
A voucher is nothing more than a means of payment because the person who holds it uses it to exchange goods or services and the issuer accepts this voucher as payment in exchange for the supply of goods or services . Thus, the High Court held that the vouchers had no intrinsic value and did not constitute goods or services. When a person buys and sells vouchers, it is simply a money transaction and therefore there can be no GST levied on it.
The above ruling offers much-needed clarity on the taxation of vouchers, particularly for organizations involved in their purchase and sale. This decision is a step in the right direction, because if GST were to be levied on the redemption of vouchers, it would result in double taxation, as the underlying goods or services (which are to be reimbursed through the voucher) are already subject to GST. Such an interpretation would go against the “one nation, one tax” principle which is the very philosophy of the GST in India. Finally, businesses that buy and sell vouchers should bear in mind that they will not be eligible for the input tax credit (ITC) on the goods and services they consume, as the supply of vouchers is a exempt supply. Therefore, if they have used ITC so far, they may need to cancel it.
(The author is a director at Price Waterhouse & Co LLP)