Chapter XVII of the Central Goods & Services Tax Act, 2017 lays down the provisions of Advance Ruling as may be sought by a taxpayer for obtaining clarification regarding the classification of goods or services, determination of time and value of supply, admissibility of input tax credit etc. The power to constitute the Authority for Advance Ruling (“AAR”) under this Chapter has been vested with the State Government. Section 96 of the CGST Act / SGST Act provides for the constitution of the AAR. There has been widespread criticism amongst the indirect tax practitioners and litigators regarding the constitution of this Authority by the various State Governments, as most of these Authorities consist of Central and State Tax Revenue Officers. It has been noted that most of these Authorities approach the Advance Ruling applications with a pro-revenue mindset, which also reflects in their final Rulings.
One would assume that the taxpayer would have a remedy in case the Ruling is found to be deficient or unsatisfactory. There does exist, in fact, a remedy in the form of Appellate Authority for Advance Ruling (“AAAR”). The irony is, even the Appellate Authority consists of the Chief Commissioners of Central & State Tax, both of whom are Revenue Officers, in all the States! Rarely has there been a case so far where the AAR has given a Ruling which has been overturned by the AAAR. To make matters worse, there is currently no option available to taxpayers to appeal against the Ruling by the Appellate Authority.
1. One of the recent trends in gifting, whether corporate or personal gifting, has been the advent of gift cards/gift vouchers. These vouchers are provided by goods/services suppliers or third party vendors and redeemable at face value of such vouchers, against goods or services, at such goods or services suppliers or even at multiple suppliers. These gift cards / vouchers are called Prepaid Payment Instruments or PPIs in short. In fact, such PPIs are regulated by the Payments and Settlements Act and the RBI, empowered thereunder, has issued the Master Direction on Issuance and Operations of Prepaid Payment Instruments.
1.1 Taxability of gift vouchers / prepaid vouchers has always been a contentious issue in our country, where in fact the Supreme Court has also been referred to multiple times to clear the indirect tax position. Since these issues were raised under the different erstwhile indirect tax laws in the country, the GST Act was designed since inception to include and clarify the intention of the Revenue for taxing such transactions under the new single indirect taxation regime. However, it now seems that a new issue has been initiated by the Tamil Nadu AAR in the advance ruling preferred by M/s. Kalyan Jewellers India Ltd. (“the Applicant”), a well-known jewellery manufacturer and retailer.
1.2 The Applicant, in this case, preferred to the Authority the following queries –
– Whether the closed PPIs issued by the Applicant to their customers would be treated as supply of goods or services?
– If yes, what would be the time of supply and GST rate of such closed PPIs?
– What would be the time of supply if PPIs are issued by third party PPI issuers?
– Whether the amount received from third party PPI issues by the Applicant be taxable under GST?
– If no, whether the GST collection at the time of redemption of the PPIs, whether issued by the Applicant or the third party PPI issuer, be sufficient compliance under GST?
– What would be the treatment of discounted PPIs given to third party PPI issuer? Will GST be applicable on the entire face value of PPI?
1.3 The facts of the case, in a nutshell, include issuance of closed PPIs by way of gift vouchers / gift cards by the Applicant to its customers at their retail outlets, which are redeemable at all the Applicant’s outlets across the country only for purchasing jewellery. The Applicant also issues such PPIs to third party issuer M/s. Quick Silver Solutions P. Ltd. at a discounted value to the face value, which the third party issuer issues to customers at face value. The discount acts as an incentive / consideration to the third party issuer. The Applicant claims that the PPIs are actionable claims or equivalent to money and issuing of PPIs are, therefore, outside the purview of GST Act by virtue of Schedule III. As per the Applicant’s submission, the sales effected at the time of redemption of the vouchers are the actual supply and should be taxed at the GST rates applicable to such sales.
2. Before we take the GST discussion further, it would be prudent to examine the taxability of such PPIs under the erstwhile indirect taxation laws in the country. The origin tax by way of Excise Duty was levied on the manufacture of goods. Since the PPIs are not related to manufacturing of goods, there was no question of Excise Duty on such goods. There was also no contention on manufacture of the paper or plastic PPIs per se, as they were broadly considered to be payment instruments and not goods. With regard to Service Tax, it was a settled position in Service Tax that actionable claims or mere transactions in money were outside the purview of Service Tax law. This was upheld by the Supreme Court in Union Of India vs. Delhi Chit Fund Association, wherein the Apex Court dismissed the petition of the Union of India against the Order of the Delhi High Court, which held that even services rendered in connection to mere transactions in money would not be chargeable to Service Tax. Also, it was well-settled that the service charges recovered from the customer would be taxable under Service Tax. At the final stage of sales of goods, VAT was applicable in most States in the country. A landmark judgment of the Supreme Court laid down in the case of M/s. Sodexo SVC India P. Ltd., wherein the Apex Court ruled that meal vouchers issued by the Appellant did not fall under the definition of ‘goods’ under the provisions of the Local Body Act, which had the same definition of ‘goods’ as the VAT Act, and therefore, would not be taxable as goods. Only when the vouchers were redeemed at the participating outlets, it would amount to sale of goods by such outlets. Therefore, it was an unofficial settlement under the erstwhile laws that gift vouchers / PPIs per se would not be taxable and only the underlying goods or services would be taxable at the time of redemption.
2.1 The current definition of PPIs as provided in the RBI Master Direction on Issuance and Operations of Prepaid Payment Instruments is given below, as this will be relied upon for further discussion –
“2.3 Prepaid Payment Instruments (PPIs): PPIs are payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. PPIs that can be issued in the country are classified under three types viz. (i) Closed System PPIs, (ii) Semi-closed System PPIs, and (iii) Open System PPIs.
2.4 Closed System PPIs: These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only and do not permit cash withdrawal. As these instruments cannot be used for payments or settlement for third party services, the issuance and operation of such instruments is not classified as payment systems requiring approval / authorisation by the RBI.
2.5 Semi-closed System PPIs: These PPIs are used for purchase of goods and services, including financial services, remittance facilities, etc., at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. These instruments do not permit cash withdrawal, irrespective of whether they are issued by banks or non-banks.
2.6 Open System PPIs: These PPIs are issued only by banks and are used at any merchant for purchase of goods and services, including financial services, remittance facilities, etc. Banks issuing such PPIs shall also facilitate cash withdrawal at ATMs / Point of Sale (PoS) / Business Correspondents (BCs).”
2.2 The case under discussion primarily deals with closed system PPIs, as the gift vouchers can only be redeemed at the Applicant’s own outlets.
2.3 The Applicant has submitted to the AAR that the PPIs are nothing but actionable claims as defined in the GST Act, which refers to the definition of “actionable claims” under the Transfer of Property Act. In my view, the AAR may be correct in dismissing this submission of the Applicant, as an actionable claim is primarily an instrument which creates a debt obligation. In the case under discussion, there is no debt obligation or beneficial interest in a defined movable property to the holder of the gift voucher. It is simply an instrument which can be used to pay the consideration for the purchase of goods at the Applicant’s outlet. Therefore, the claim of the Applicant to exclude the issue of vouchers from the purview of GST on this basis would be incorrect.
3. The answers to all other questions raised by the Applicant were dependent on how the AAR classified the issue of gift vouchers. This is also the primary point of discussion of this article.
3.1 The term “voucher” has been defined in the GST Act under Section 2(118). The definition is reproduced below for reference –
“(118) “voucher” means an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument;”
3.2 It can be derived from the above that a voucher is nothing but an instrument which can be considered as consideration / part consideration for – 1) a supply of goods or services, 2) from suppliers – both of which are pre-defined or known to both parties.
4. I believe the confusion created by the lack of clarity on the identification of supply has led to the AAR classifying the supply of gift vouchers per se as a supply of goods. The AAR has clarified in their Ruling that the vouchers are “goods” as defined under the GST Acts since the vouchers have a value and an ownership, they are movable, and they are the property of the purchaser. Also, since a consideration is paid for the supply, which is in the course or furtherance of business, it shall be considered to be a “supply” under Section 7 of the State GST Act. In fact, the AAR has further gone on to classify the printed vouchers under the HSN 4911 and the prepaid gift cards under the HSN 8523 for the purpose of determining the GST rate applicable!
4.1 It is important to note here that the definition of “voucher” has been adopted almost verbatim from the EU VAT law which is adopted by all countries belonging to the European Union. The EU VAT laws were amended by a Directive for clarification on treatment of vouchers in 2016. The amendment clearly stated that the supply of vouchers would be treated as supply of the underlying goods or services. The amendment further specified that in case of Single Purpose Vouchers (“SPV”), where the goods or services are pre-defined and the applicable VAT on such goods or services is pre-known to the issuer, the tax would be levied at the time of issue of such SPV. Anything other than SPV is classified as a Multi-Purpose Voucher (“MPV”), where the tax is levied at the time of supply of underlying goods or services, depending on the VAT applicable to such goods or services. The above time of supply provision for vouchers have been adopted by in the CGST Act in Section 12(4) and Section 13(4) which deal with the time of supply of vouchers for goods or services, although there is no bifurcation as SPV or MPV. Also, the Indian GST provisions do not clearly indicate the identification of the supply, unlike the EU VAT laws which clearly state that the supply shall be considered to be a supply of the underlying goods or services. This has led to a grey area in the law.
4.2 Further, one of the primary reasons for implementation of a nationwide common indirect taxation system was to abolish the cascading taxation on the same goods or services. This cascading of different taxes was leading to double taxation which further led to inflation in prices. In the instant case, the AAR has opined that the tax is to be paid on the supply of vouchers / gift cards as goods. When the consumer redeems such PPIs at the Applicant’s outlet, the supply of jewellery will again be considered as a supply of goods by the Applicant, since it also meets all the requirements of Section 7. However, the consideration towards such goods shall be received by way of the PPIs on which GST has already been paid before. Therefore, the Applicant would have to pay tax on the same amount of consideration twice, once at the time of issuance of the vouchers and again at the time of supply of jewellery. This is a classic case of double taxation and it definitely cannot be the intention of the Government. Hence, it seems that this interpretation of the AAR is misplaced.
4.3 Also, the AAR has itself classified the vouchers as payment instruments which are covered under the definition provided in the Payment & Settlement Act. They have themselves mentioned that “it is only an instrument accepted as consideration / part consideration while purchasing the goods from the issuer and the identity of the supplier is established in the PPI.” It can be implied by one that such PPIs are, therefore, equivalent to money and excluded from the definition of “goods” and hence, outside the purview of GST. However, this argument may have a weak standing, as such PPIs cannot be converted to or exchanged for money. The AAR has also emphasised in one of the paragraphs that in their view, PPIs are not money. It is a valid argument nonetheless.
4.4 A revenue-favourable argument, which it may seem that the Applicant has deliberately held back from presenting before the Authority, is the valuation of such vouchers. Section 15(5) of the CGST empowers the Government to lay down the provisions of value of supply in special cases. The Government has notified Rule 32 of the CGST Rules to determine the value of supply in specified cases thereunder. Sub-rule (6) of Rule 32 is reproduced below –
“(6) The value of a token, or a voucher, or a coupon, or a stamp (other than postage stamp) which is redeemable against a supply of goods or services or both shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon, or stamp.”
4.5 The above Rule clearly states that the value of supply of the voucher shall be equal to the money value of the goods or services redeemable against such voucher. Since the Rule mentions “the value of supply of the voucher”, it may be considered that the intention of the Government was to tax the voucher per se. However, it contradicts the provisions of the EU VAT law wherefrom these provisions have been adopted. Also, since it points to the money value of underlying goods or services, one may counter-argue that it is, in fact, the intention of the Government is to tax the underlying goods or services.
5. In view of the above arguments, I firmly believe that the Authority should have deliberated the issue presented by the applicant in depth and given a Ruling keeping in view the most basic aspects of GST. If a taxpayer is approaching the Authority with an issue which requires clarity, it is the duty of the Authority to examine the issue in the light of all the relevant provisions of the law and not only the ones which it deems beneficial to the Government Revenue. This farce, however, is a product of the law itself, which vests the power of constitution of these Authorities with the Revenue. I am sure the applicant has mulled over an appeal to the Appellate Authority with little hope. After all, the AAAR is also the Revenue in disguise, who shall approach the Revenue-favourable Ruling by the lower Authority with the same mindset and narrow view.