Vouchers under GST: Navigating their many realities

Don't we all love spy movies wherein a seemingly negative character plays a very crucial role? Vouchers in GST are much like that.

As per the schema of the CGST Act, 2017, vouchers were discussed under Sections 12 and 13 of the GST Act, which have since been amended.

But as the concept of the voucher in Indian GST was essentially borrowed from the European Union, one cannot comprehend its relevance without studying the historical development of this concept in that part of the world.

This article examines key scenarios where mis-characterisation of vouchers has led to significant tax exposure.

Meaning of a voucher

Vouchers mean instruments that carry an obligation to be accepted as a consideration for the supply of goods or services, and where the identity of goods or services to be supplied or the identity of the supplier is mentioned on the instrument or in related terms. See Section 2(118) of the CGST Act, 2017.

On a bare reading, the two conditions are sine qua non for an instrument to be considered as a voucher, i.e. there should be an obligation to accept the instrument as a consideration, and either the identity of the supplier or the supply should be identified. If any instrument does not satisfy these conditions, then such instruments cannot be considered as a voucher [1].

In addition to the above, in some cases, the instruments may satisfy the above conditions in form; however, substantially, they may be considered as a supply of service or a discount or perquisites given to employees.

Thus, a detailed study of the substance of the transaction is required to ascertain whether the instruments are in essence carrying an obligation of being accepted as a consideration or whether the instrument is disguising something else. In this regard, the following tests may help in ascertaining the substance of the transaction:

Vouchers may constitute a separately identifiable service

Vouchers may cloak a separate supply of services if there is more than one independent transaction taking place, wherein one transaction would involve the supply of primary goods or services, and the other transaction may be a separate consumable benefit being given by the supplier to the recipient. In this case, both the transactions would qualify as a supply and be liable to GST. Let's understand this with some examples:

• Online gaming platforms allow customers to purchase their in-game currency and use such currency to purchase in-game benefits, such as upgrading the level in the game, purchasing swords, costumes, etc., at the gaming portal.

In this case, a plain reading would suggest that the in-game currency qualifies as a voucher, as it can be redeemed to buy in-game accessories.

To the contrary, the ECJ in a similar case in Case C 472/24, MB Z aidimu valiuta [2]held that a voucher is an instrument which defines a supplier's obligation to accept it as a consideration and documents the supplier's obligation to supply a service. However, the in-game currency is itself a consumable benefit which is exchanged for other consumable benefits, such as in-game costumes, etc. Thus, the in-game currency is an electronic service and not a voucher.

However, ECJ in ECJ C-68/23, Finanzamt O has held that the purchase of digital content with Card X (which is to be loaded with real money) qualifies as a voucher.

The difference between the above two cases is that in Zaidimu's case, the gold coins themselves were considered as a separate service, whereas in Finanzamt's case, the Card X was an instrument which carried an obligation to be accepted as a consideration for the purchase of digital content.

• Nowadays, shopkeepers or E-commerce platforms allow special discounts on the purchase of products supplied by them if the customer opts for a membership scheme by paying a membership fee. In a plain reading, the membership fees may appear as a voucher which enables future discounts.

However, in substance, the membership fees represent consideration for a right given by the supplier to a customer to avail discounts on future purchases. Thus, the whole structure of membership fees becomes a service and not a voucher. The same principle has been upheld by the Supreme Court of Germany in BFH judgment of December 18, 2019- XI R 21/18 BStBl 2020 II p. 723.

To the contrary, the ECJ in C-637/20, DSAB Destination Stockholm has held that a city card gives a cardholder the right to be admitted to around 60 attractions, such as sights and museums, for a limited period of time and up to a certain value are vouchers.

The differentiation between the BFH judgement above and the DSAB judgement is that in the former case, an ascertainable right was given to the buyer to purchase goods at a special discounted price, whereas in the latter case, the instrument, i.e., the city card, carried an obligation to be accepted as a consideration for availing access to sights and museums.

Vouchers may constitute a discount

There is a significant difference between a voucher and a discount coupon in as much as a voucher carries an obligation to be accepted as a consideration, and the taxable value of the supply remains unchanged, whereas a discount coupon merely entitles a discount to the recipient, which effectively reduces the taxable value of the transaction.

Consequently, it can be said that any instrument which effectively allows a discount on MRP and which does not carry an obligation to be accepted as a consideration, will not be considered as a voucher.

In support, reference can be drawn to a ruling pronounced by ECJ in C-436/24, Lyko Operations wherein it has been held that allowing loyalty points in exchange for a minimum value of purchases and redemption of such loyalty points against purchase of another goods or services is a discount scheme and not a voucher since the loyalty points do not contain an obligation to be accepted as a consideration.

A similar view was upheld by ECJ in C-317/94, Elida Gibbs Ltd., wherein it was held that in cases wherein the manufacturer is giving gift coupons to wholesalers for giving it to customers and compensating wholesalers for discounts given by them against such coupons, they qualify as a discount for the manufacturer and the manufacturer is not liable to pay tax on the value of such coupons.

Further, in C-48/97, Kuwait Petroleum (GB) Ltd, ECJ held that the sale of fuel and redemption of gift coupons received by customers on purchase of such fuel are independent transactions and should be independently assessed to tax.

To the contrary, in C-53/09 & C-55/09, Loyalty Management UK and Baxi Group, ECJ held that in case wherein under a loyalty points scheme, a customer purchases goods from Company A and gains points from such purchase, which can be used to buy goods at Company B, the redemption of loyalty points would be considered as a third party consideration for goods sold by Company B.

The difference between all the above three cases and Loyalty Management's case is that in the latter case, the instrument carries an obligation to be accepted as a consideration.

Vouchers may constitute a perquisite

In some situations, companies may also give vouchers to their employees, which can be redeemed against specified goods and services. In cases wherein such vouchers are given for free of cost, the vouchers become part of employee emoluments. See ECJ's ruling in C-607/20, GE Aircraft Engine Services.

However, where the employees pay for such vouchers, the same is considered a trading of vouchers by the employer and dealt accordingly. See ECJ's ruling in C-40/09, Astra Zeneca.

From the above discussion, it becomes clear that the characterisations of instruments as vouchers cannot be determined merely by the nomenclature but must be grounded in the underlying substance of the transaction and the nature of the rights they create.

As business models continue to evolve, the risk of mis-characterisation will only increase, making it imperative for taxpayers to carefully evaluate voucher structures before implementation.

Until clearer guidance emerges under Indian GST, prudence lies in recognising that what appears to be a voucher may be something entirely different.

[1] ECJ C-436/24 (Lyko Operations)

[2] C 472/24, MB Z aidimu valiuta v Valstybine mokesc iu inspekcija prie Lietuvos Respublikos finansu ministerijos.

(Authored by CA Pooja Jajwani, can be reached at [email protected])