In a recent clarification, the Central Board of Indirect Taxes and Customs (CBIC) provided insights into the goods and services tax (GST) treatment of transactions involving vouchers. According to the CBIC, vouchers can be categorised into two types.
The first category includes prepaid instruments, such as gift cards and digital wallets, which are recognised by the Reserve Bank of India (RBI). These vouchers are treated as ‘money’ under the GST framework, meaning transactions involving them will not be classified as either the supply of goods or services.
The second category comprises non-prepaid vouchers, which do not qualify as prepaid instruments. These vouchers serve as claims to receive specific goods or services and fall under the definition of ‘actionable claims’. Similar to their prepaid counterparts, these transactions also do not count as the supply of goods or services for GST purposes.
The CBIC underlined that, regardless of the type of voucher, transactions involving vouchers themselves will not be construed as the supply of goods or services. However, the actual goods or services that can be redeemed using these vouchers may still be subject to GST.
The CBIC further provided important guidance on the GST implications for transactions involving vouchers distributed by distributors, sub-distributors, and agents. The CBIC outlined two primary models for voucher distribution:
Principal-to-principal basis: In this model, distributors buy vouchers from issuers at discounted prices and sell them to sub-distributors or customers, earning a profit from the price difference. Since these transactions do not qualify as the supply of goods or services, they will not be subject to GST.
Commission/fee basis: In this model, distributors and agents act as representatives of the voucher issuer, providing marketing and support services in exchange for a commission or fee. Since these agents do not own the vouchers and operate under the issuer’s guidance, GST will apply to the commission or fees earned, as it is considered a supply of services.
With regard to GST for additional services and unused vouchers, the CBIC said that if distributors or other service providers offer services like advertising, co-branding, or customer support to voucher issuers, they can charge a service fee. This fee is subject to GST, meaning businesses must pay tax on it according to the applicable rates.
Regarding unused vouchers, when vouchers go unused after their expiry date, known as breakage, the CBIC clarified that since these vouchers are not redeemed, there is no supply of goods or services, and therefore, the money from these unredeemed vouchers is not taxable under GST.
The CBIC stressed that for any payment to be taxable, there must be a clear agreement between the parties involved. Since no such agreement exists for unredeemed vouchers, businesses do not need to pay GST on these amounts.
“The government has provided comprehensive clarity regarding the GST treatment of vouchers, addressing key concerns raised by trade and industry. It is now clarified that transactions involving vouchers, whether as prepaid instruments or actionable claims, do not constitute the supply of goods/services and are thus not liable to GST. However, GST is applicable to additional services related to vouchers, such as marketing, customisation, or commission-based distribution. Similarly, unredeemed vouchers, or ‘breakage’, are not taxable as they do not constitute consideration for any supply,” an tax expert said.
“It may, however, be interesting to see if the industry explores claiming a refund of costs borne on GST already paid on such unredeemed vouchers. Overall, it’s a significant development for the industry as it will help bring certainty regarding taxes and reduce undue litigation,” he added.
