Vouchers from third-party vendors for loyalty programs qualify as goods but restrict input tax credit under Section 17(5)(h)

AAR Karnataka ruled that vouchers and subscription packages procured from third-party vendors for loyalty programs constitute goods as movable property capable of transmission. The applicant cannot claim input tax credit on these vouchers since they are distributed free to customers against loyalty points without consideration, qualifying as disposal by way of gift under Section 17(5)(h) of CGST Act 2017, which restricts input tax credit availability for such supplies.

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Issues Involved:
1. Eligibility to avail input tax credit (ITC) on vouchers and subscription packages procured by the applicant from third-party vendors.
2. Classification of vouchers as 'goods' or 'services.'
3. Applicability of Section 17(5)(h) of the CGST Act 2017 regarding gifts or free samples.

Detailed Analysis:

1. Eligibility to Avail Input Tax Credit:
The applicant sought an advance ruling on whether they can avail ITC on vouchers and subscription packages procured from third-party vendors and provided to customers participating in a loyalty program. The applicant argued that these procurements are for business purposes and fulfill the conditions under Section 16 of the CGST Act 2017, which allows ITC for supplies used in the course or furtherance of business.

2. Classification of Vouchers as 'Goods' or 'Services':
The judgment examined whether vouchers, including e-vouchers, should be classified as 'goods' or 'services.' The definition of 'goods' under Section 2(52) of the CGST Act 2017 includes every kind of movable property, tangible or intangible. The judgment referenced the Supreme Court's observations in Tata Consultancy Services Vs State of Andhra Pradesh (2004) and Vikas Sales Corporation Vs. CCE (1996), concluding that vouchers are movable property and thus qualify as 'goods.'

3. Applicability of Section 17(5)(h) of the CGST Act 2017:
Section 17(5)(h) restricts ITC on goods disposed of by way of gift or free samples. The judgment analyzed the loyalty program's mechanics, noting that customers earn loyalty points based on purchases, which can be redeemed for vouchers and subscription packages. These loyalty points have no monetary value, are non-transferable, and cannot be converted to cash. The redemption involves no monetary consideration from the customer, implying that the vouchers are given free of cost and thus qualify as gifts under Section 17(5)(h).

Conclusion:
The ruling concluded that the applicant is not eligible to avail ITC on the vouchers and subscription packages procured from third-party vendors. The vouchers are classified as 'goods,' and their provision to customers against loyalty points is considered a disposal by way of gift, falling under the restriction of Section 17(5)(h) of the CGST Act 2017. Thus, the input tax credit is not available for these procurements.

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