GST implications on Amazon Seller Rewards under Seller Flex Model

With the lockdown being imposed due to Covid-19, online business has grown manifold. Many traditional businesses are selling their goods online, whether through their own websites or through E-Commerce portals like Amazon. To push online business further, portals like Amazon come up with different models to ensure faster delivery of goods to the customer. One such model is the fulfillment model of E-Commerce wherein sellers store the goods at the warehouse managed by Amazon and as and when orders are placed, Amazon ships the products directly to the customer. While fulfillment model proved to be a huge success for Amazon and sellers alike, it came with its own drawbacks, the major one being high storage costs, high order fulfillment cost charged by Amazon to the sellers. This, in turn made the products expensive and thus making online purchase less attractive for the customer.

To address this issue, Amazon came up with another new model known as Seller Flex Model. This model is basically an extension of fulfillment model of E-Commerce. Under this model, the products of the seller are shown on the Amazon portal as fulfilled by Amazon. However, the inventory of the products are maintained at 2 locations- one at the Amazon warehouse and one at the warehouse managed by seller. As and when orders are received on the Amazon portal, the warehouse which is closest to the location of the customer ships the products to the customer. Even when the goods are shipped from the warehouse of seller, the goods have to be packed in Amazon branded packaging material, so that the goods are still seen by the customer as Fulfilled by Amazon. This is a new program brought by Amazon and is designed to ensure timely delivery of the products from the warehouse closest to the customer, while effectively managing the seller storage costs, packing cost, pick up fees which is otherwise charged by Amazon. This program brought considerable savings for sellers whose products weighed about 1 kg to 5 kg, by allowing them to store the goods at their own warehouse while still having the tag of ‘Amazon fulfilled’ on the products on the Amazon portal.

To encourage this Seller Flex program among sellers, Amazon brought a seller rewards program for vendors following the Amazon Seller flex program. The purpose of this article to analyse the GST implications on such rewards given by Amazon.

Understanding of Seller Rewards

Let us take an example, of Mr. A who is selling goods through Seller Flex model. For every order shipped through this program, Amazon is giving the following rewards:

These rewards will keep on getting accumulated in the account of Mr. A for every order shipped. As and when Mr. A deems it appropriate, Mr. A can login to the Amazon portal and redeem whatever amount of rewards he deems fit. Let us say Mr. A has accumulated rewards of around 20,35,000 as on 30 June 2021. Now, if Mr. A wishes he can redeem rewards of any amount, let us say, 15,00,000 and the balance rewards can be redeemed as per his convenience in future. The redeemed amount of 15,00,000 shall be shown as a payable by Amazon to Mr. A in their monthly statement. In this regard, we need to understand the following:

> Whether Mr. A has to pay GST on the rewards redeemed?

> If yes, what shall be rate at which GST shall be paid. If GST is payable on the products of Mr. A at the rate of 5%, then will GST be payable on the rewards redeemed at the rate of 5% or will GST be payable at the rate of 18% being the general rate applicable to all services?

GST Implications

• Under the CGST Act, 2017 (‘Act’) taxable event is ‘supply’ of goods and services. If any transaction qualifies to be a supply as per the provisions of the Act, GST shall be levied.
• As per Section 7 (1) of the Act all transactions of goods and services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made for a consideration and in the course or furtherance of business shall be covered within the meaning of ‘Supply’. However, as per Section 7(2), activities or transactions specified in Schedule III to the Act shall be treated as neither supply of goods nor services. This means that activities specified in Schedule III to the Act shall not be treated as supply of goods or services and tax shall not be charged even if the transaction was earlier qualifying as a supply within the meaning of Section 7(1).

The relevant extract of Schedule III for the subject transaction is given below for ready reference:

“SCHEDULE III

[See Section 7]

Activities or transactions which shall be treated neither as a supply of goods nor a supply of services

1…….

6. Actionable claims, other than lottery, betting and gambling.”

Thus, Actionable claims other than betting, gambling and lottery shall be treated as neither supply of goods nor services and GST shall not be levied.

• At this juncture, there is a need to examine whether the transaction of redeeming seller rewards on Amazon portal comes within the meaning of Actionable Claim.

As per Section 2(1) of the Act,

“actionable claim” shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882.

As per section 3 of Transfer of Property Act,

“actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.”

Basically, actionable claim means a claim for any amount receivable (debt) or claim for benefit of any movable property not in possession for which relief can be claimed in Civil Court.

• We understand that seller rewards shall not fall in the ambit of claim for debt, but we need to examine whether the same shall fall within the meaning of beneficial interest in movable property.

Black’s Law Dictionary defines ‘beneficial interest’ as follows– “A right or expectancy in something (such as a trust or an estate), as opposed to legal title to that thing. For example, a person with a beneficial interest in a trust receives income from the trust but does not hold legal title to the trust property”. Therefore ‘beneficial interest in movable property’ is a right or expectancy in a movable property like right to receive income accruing from a movable property.

• In the present case, the seller rewards program, entitles Mr. A to claim beneficial interest in the form of monetary rewards on fulfilling orders under the Seller Flex model. Under the seller flex model, goods may be dispatched from the Amazon warehouse or the warehouse of the vendor depending upon the location closest to the customer. If the goods are dispatched from the warehouse of the vendor, the vendor has to use Amazon branded packaging and ensure that the packaging of the order is prompt to ensure that it can be picked by Amazon Transportation Systems (ATS) to ensure timely delivery. Further, the entitlement of rewards is dependent on the price of item that is being sold by Mr. A. If the price is upto 250, rewards shall be INR 23 per item and if the price if between 250 to 500, rewards shall be INR 15 per item.
• Thus, Mr. A has a claim to the rewards only if it fulfils the order in compliance with the conditions of Seller Flex model.  Further, Mr. A has to select the rewards that they would like to redeem, and the rewards redeemed shall be credited by Amazon to the ledger of Mr. A. It is possible that the rewards, if not redeemed within a given time frame shall lapse. Thus, the claim of Mr. A is contingent upon events occurring such as- compliance with certain conditions of order packaging, item price and redemption of rewards within a given time frame.
• Further, the seller rewards program fulfils the definition of a contract under the Indian Contract Act, 1872 and non-performance of the contract by Amazon.in can invite legal action if initiated by Mr. A. Therefore, it is clear that Civil Courts shall recognize and can provide grounds for relief if and when Mr. A makes a claim to such beneficial interest in rewards.
• Thus, the transaction fulfils all the conditions and qualifies as a actionable claim within the meaning of the Act and accordingly a transaction in Actionable claim shall be treated as neither supply of goods nor services.
• Thus, GST shall not be charged on the Amazon seller rewards redeemed by Mr. A

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(The author is a practicing Chartered Accountant based in Delhi and can be reached at nitin@pgoel.in or 9811933762)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied without express written permission of the author.