The Central Board of Indirect Taxes and Customs (CBIC) has issued yet another progressive and purposeful clarification through Circular No. 243/37/2024-GST | Dated: 31st December, 2024 that significantly addresses various aspects of GST treatment on taxability for Vouchers. This comprehensive guidance comes as a response to the increasing complexity in voucher transactions which is picking up exponentially and aims to resolve ongoing ambiguities that have led to diverse interpretations by field formations and created challenges for the trade and industry.
2. This business landscape has evolved significantly, particularly in how vouchers are used and distributed and finally redeemed. The circular tackles four critical areas that have been sources of confusion:
1. the fundamental nature of voucher transactions,
2. the GST treatment of voucher distribution,
3. the handling of additional services related to vouchers, and
4. the treatment of unredeemed vouchers.
3. At its core, a voucher serves as an instrument that creates an obligation for suppliers to accept it as consideration for goods or services. The vouchers are considered as actionable claims under certain legal interpretations. The Madras High Court recently in W.P. No. 5130 of 2022 and W.M.P. Nos. 5227 & 5228 of 2022 provided significant clarification on this matter, where it has held that Vouchers represent a right to approach civil court to recover the specified amount, they are like “frozen cash” that can be used for future purchases, while emphasising that vouchers are similar to prepaid instruments (PPI) and debt instruments.
4. The circular referred supra makes an important distinction between vouchers recognized as pre-paid instruments (PPIs) by the Reserve Bank of India and those that are not. This distinction has significant implications for GST treatment. When a retail chain issues a gift card that qualifies as a PPI under RBI guidelines, it falls under the definition of “money.” For instance, when a customer purchases a ₹1,000 shopping voucher from a major retail chain, this transaction in the voucher itself is neither a supply of goods nor services. However, when the customer later uses this voucher to buy clothes worth ₹1,000, that underlying transaction becomes subject to GST.
5. The circular outlines two primary models for voucher distribution, each carrying distinct GST implications. In the Principal-to-Principal (P2P) model, a distributor might purchase festival gift vouchers worth ₹10,000 from an e-commerce platform at ₹9,500 and sell them to corporate clients at ₹9,800. The ₹300 margin earned by the distributor in this scenario is not subject to GST since the trading of vouchers itself is neither a supply of goods nor supply of services. In contrast, under the commission-based model, an agent helping distribute restaurant vouchers and earning a 5% commission on sales would need to pay GST on their commission income, as it represents a service provided to the voucher issuer.
6. There are other additional services also associated with vouchers that receive special attention in the circular. Marketing agencies providing co-branding services for retail vouchers, charging monthly fees for their services, must apply GST to these charges. Similarly, technology companies offering customer support services for voucher redemption must charge GST on their service fees. This clarity helps businesses properly structure their service agreements and ensure compliance.
7. One of the most significant aspects of the clarification relates to unredeemed vouchers, often referred to as “breakage.” Consider a spa that issues vouchers worth ₹100,000, but vouchers worth ₹10,000 remain unredeemed at expiry. The circular definitively states that this breakage amount is not subject to GST since there is no underlying supply of services. This brings much-needed clarity to a previously ambiguous area.
8. For businesses to implement these clarifications effectively, they need to undertake a comprehensive review of their existing voucher programs. This involves evaluating whether their vouchers qualify as PPIs under RBI guidelines, as this classification fundamentally affects GST treatment. Companies must also examine their relationships with distributors and agents, ensuring their agreements clearly define whether they operate on a P2P or commission basis. This clarity is essential for proper GST treatment of various charges and fees. Apart from this, the accounting implications are equally important. Businesses must ensure their systems can properly track and categorize different voucher transactions, particularly distinguishing between voucher sales and the underlying goods or services transactions. Clear documentation becomes crucial, especially for additional services provided in connection with vouchers. Business entities must also implement robust systems to monitor voucher expiry and breakage, ensuring proper accounting treatment while documenting that no GST applies to unredeemed amounts.
9. The long-term implications of this clarification are significant for the business ecosystem. A multi-brand retail company can now confidently launch a new voucher program with clear understanding of how to structure their distribution network and handle unredeemed vouchers. E-commerce platforms can design their voucher systems with precise knowledge of GST implications for different distribution models. This clarity reduces the potential for litigation, simplifies compliance processes, and ensures uniform implementation across different jurisdictions with a significant step toward creating a more predictable tax environment for businesses dealing with vouchers.
10. The impact extends beyond mere compliance. Businesses can now innovate in their voucher programs, knowing clearly how different transaction features will be treated under GST. This clarity promotes business growth while ensuring that tax treatment remains clear and consistent across different business models and jurisdictions.
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