The last decade saw a rapid increase in transactions involving coupons and vouchers. Advent of e-commerce companies also added to this boom. The modus-operandi of voucher business has made the operation of tax legislations very complex.
The Supreme Court in the year 2015 re-examined the taxability of vouchers in the Sodexo case in the context of Entry tax and held that pre-printed meal vouchers are not “goods”. There are various High Court decisions under the VAT and Income tax laws holding that the recharge coupons are not “goods”. While one was hoping that these rulings would help in resolving taxability issues of vouchers henceforth, with the advent of the Goods and Services Tax (GST) making special provisions for taxation of vouchers, the legal position needs to undergo a judicial scrutiny once again.
The concept of taxation of voucher in GST regime has been borrowed from Europe. With effect from January 1, 2019, Europe did a complete overhaul to the vouchers’ rules to simplify the tax treatment of vouchers based on 2016 Draft VAT Directive, to prevent either the non-taxation or double taxation of goods or services which relate to vouchers. Under previous EU legislation, a customer was deemed to be receiving two supplies: a voucher; and an underlying supply of goods or services. The changes effective from January 1, 2019 make clear that, for VAT purposes, there will no longer be a separate supply of a voucher; only the supply of the underlying goods or services, which will be provided in exchange for the voucher later. Similar position has been borrowed in India putting an end to the earlier controversies whether supply of voucher is supply of goods or services.
After defining the term ‘voucher’, the Indian GST law provides merely for the time of supply of such vouchers. It has also attempted to provide for the value of a voucher to some extent. The law states that in case of supply of vouchers, the time of supply of underlying goods or services shall be the date of issue of voucher, if the supply is identifiable at that point or the date of redemption of voucher, in all other cases. Regarding valuation, the law provides that the value of voucher, which is redeemable against a supply of goods or services, shall be equal to the money value of the goods and/or services redeemable against such voucher. Unfortunately, India has borrowed only some limited provisions from Europe leaving behind many grey areas. The incomplete law is paving the way for future litigation which can get settled only at the level of the Supreme Court. Let us understand the emerging issues with the help of a few examples.
These days it is a very common practice for e-commerce companies to purchase vouchers of other companies be it a food coupon, spa voucher or any other voucher/coupon and use it for promotional purposes like giving it free or at a discounted price to their customers. Take an example where an e-commerce company purchases a food coupon having a face value of Rs. 500 from a food outlet for Rs 300. The e-commerce company sells the same to the ultimate customer for Rs. 400. The ultimate customer goes to the food outlet and consumes the food against the voucher. Here, the supply is not known at the point of issuance, therefore, the voucher will be taxed at the time of redemption. However, there is no clarity on tax treatment of intermediate transactions and their valuation. Whether the intermediate persons can be said to be trading in voucher or only acting as an intermediary is an unknown territory in the Indian GST law and needs to be judicially examined. Moreover, the ITC eligibility of such intermediate persons also becomes questionable. In Europe, there are specific provisions deeming each transfer as supply of relevant goods/services and thereafter, exempting each preceding transfer in such cases. The European law provides for charging full tax on the value of most recent transfer, if such value is known and else, the face value. The Indian law is also silent on the tax treatment if such voucher is not redeemed by the final consumer during its validity period, and the consideration received for such voucher is kept by the seller.
There is a growing trend of corporates distributing vouchers to their employees for free. As per the deeming provisions in the GST laws, the transaction between employer and employees are taxable even without consideration. This raises the issue regarding the taxability of vouchers in the hands of employers.
The new provisions on vouchers in the GST law are not sufficiently clear or comprehensive to ensure consistency in the tax treatment of transactions involving vouchers, to an extent which has undesirable consequences for the businesses. The landmark GST has already completed two years and it is the high time for the Government to trace the missing tail.
The author is a the Joint Director at Lakshmikumaran & Sridharan