GST ON Prepaid Payment Instruments-The Cauldron of various ingredients.

PREAMBLE

The explosion of use of technology in India has led to a massive spike in the trade that is conducted in the E-Com platform. Also, with the ever increasing Fin-Tech and Med-Tech space offering various hybrid models of doing business in that space, the usage of e-vouchers have gained momentum in India. The usage of e-wallets and e-transactions is not limited to the Urban India but has also spread quite in the Semi urban areas as well.

Vouchers in various forms have always been in the forefront of litigation from an Indirect tax perspective. The issue of indirect tax impact on Food & Beverage coupons have seen its pilgrimage right up to the Hon’ble Apex Court in the legacy law. The situation is no different in the GST ecosystem. This Note seeks to throw light to some extent on the “what, why, how and when” of the GST impact on issuance of Vouchers in the different forms it may be issued.

PREPAID PAYMENT INSTRUMENTS

Prepaid instruments (hereinafter referred as “PPI’s”) are pre-loaded cards or a payment method that can be utilised for purchase of goods or services. The value of such instrument represents the consideration or the value that has been paid by the holder up front.  PPI’s can be in the form of payments wallets, smart cards, vouchers, mobile wallets etc.

Prepaid Payment instruments (“PPIs”) are regulated by the Payments and Settlements (“PSS”) Act, 2007 and the Reserve Bank of India (“RBI”).

The taxability of such instruments has been a contentious issue in our country since the era of erstwhile indirect tax laws and continues to be so in the current GST era as well. One of the major questions that arises in relation to the PPIs under the GST law is whether they are goods or services and if the same are taxable.

The GST lawmakers have not yet included the definition of a Pre-paid Instrument (PPI) in the act. Therefore, it would be pertinent to note the various contours of the same as set out by the regulatory authority in the said space, namely the Reserve Bank of India. The RBI has issued guidelines from time to time set out the guidelines on the operational aspect of the PPIs and thereby has issued Master Directions and made various amendments to it. Let us first analyse the same to gain some insights about PPI.

The Master Direction on Issuance and Operation of PPIs dated October 11, 2017 issued by

RBI in exercise of the powers conferred under Section 18 read with Section 10(2) of the PSS Act, 2007 defines PPIs as “payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments”. The value stored on such instruments represents the value paid for by the holder either by cash, or by debit to a bank account, or by credit card.

RBI has classified PPIs into three major heads:

1. Closed System PPIs
2. Semi-closed System PPIs and
3. Open System PPIs.

The same are explained as below-

Closed System PPIs:

1. These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only.
2. These do not permit cash withdrawal.
3. These cannot be used for payments or settlements for third party services.
4. The issuance and operation of such instruments is not classified as payment systems requiring approval / authorisation by the RBI.
5. Examples: Paper-based vouchers and coupons that are usable within the issuer entity, smart cards such as metro railcards that are useable within the issuer entity, gift cards.

From the above, we understand that close PPI’s can be issued by any entity for making supply of goods or services, exclusively from the said entity. Such PPIs cannot be used for cash payments/settlements or withdrawals. Therefore, RBI approval is not mandated or required for issuance of such PPIs.

Semi-closed System PPIs:

1. These PPIs are used for purchase of goods and services, including financial services, remittance facilities, etc.
2. These instruments do not permit cash withdrawal, irrespective of whether they are issued by banks or non-banks.
3. These can be used at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments.
4. Examples: PPIs issued by Banks: HDFC Bank’s PayZapp and SBI’s YONO.

PPIs issued by non-banks: Paytm and GPay (Authorized by RBI).

Such PPIs can be issued by Banks and Non-banks. Its functioning is similar to that of a closed PPI, as the same can be used for purchase of goods and services and the same cannot be withdrawn. However, unlike a closed PPI, a semi-closed PPI can be used for settlements. Therefore, they require prior approval from RBI for issuance.

Open System PPIs:

1. These PPIs are issued only by Banks and are used at any merchant for purchase of goods and services, including financial services, remittance facilities, etc.
2. These facilitate cash withdrawal at ATMs / Point of Sale (PoS) / Business Correspondents (BCs).
3. Examples: Debit cards and credit cards.
4. Cash withdrawal at PoS terminals is permitted upto a limit of Rs. 2000/- per day in rural areas and Rs.1000/- per day in other areas, subject to the same conditions as applicable hitherto to debit cards (for cash withdrawal at PoS).

Unlike closed and semi closed PPI’s an open PPI can only be issued by a Bank. They can be used for both cash settlements/payments and withdrawals.

Now that we have understood the various types of PPIs, it is now pertinent to understand who is eligible to issue the above-mentioned categories of PPI as per RBI.

1. Banks which comply with the eligibility criteria as laid down by RBI including those stipulated by the respective regulatory department of RBI – are permitted to issue semi-closed and open system PPIs (after obtaining authorization from RBI).

1. Non-Bank entities which comply with the eligibility criteria as laid down by RBI including those stipulated by the respective regulatory department of RBI – are permitted to issue only semi-closed system PPIs (after obtaining authorization from RBI).

Further, below are the various classification of PPI under the categories discussed above:

Semi-closed Systems PPIs that can be issued by banks or non-banks:

PPIs up to Rs.10,000/- by accepting minimum details of the PPI holder:

1. Bank and non-bank Issuers shall be permitted to issue these PPIs after obtaining minimum details of the PPI holder which shall include mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the ‘officially valid document’
2. They shall be reloadable in nature and issued only in electronic form, including cards.
3. The amount loaded in such PPIs during any month, the amount outstanding at any point of time and total amount debited from such PPI during any given month, shall not exceed Rs.10,000/-, the total amount loaded during the financial year shall not exceed Rs.1,00,000/-
4. They shall be used only for purchase of goods and services.
5. Funds transfer from such PPIs to bank accounts and also to PPIs of same / other issuers shall not be permitted.
6. These PPIs shall be converted into KYC compliant semi-closed PPIs (as mentioned below) within a period of 24 months from the date of issue of PPI, failing which no further credit shall be allowed in such PPIs. However, the PPI holder shall be allowed to use the balance available in the PPI.
7. This category of PPI will not be issued to the same user in future using the same mobile number and same minimum details.
8. PPI issuers shall give an option to close the PPI at any time and outstanding balance at the time of closure, shall be transferred at the request of the holder to the ‘own bank account of the PPI holder’ (duly verified by the Issuer), after complying with KYC requirements of the PPI holder.
9. PPI issuers shall also allow to transfer the funds ‘back to source’ (payment source from where the PPI was loaded) at the time of closure.

PPIs up to Rs.2,00,000/- after completing KYC of the PPI holder:

1. Bank and non-bank Issuers shall be permitted to issue these PPIs after completing KYC of the PPI holder
2. They are similar to the open system PPIs, are reloadable in nature and issued only in electronic form, including cards.
3. The amount outstanding shall not exceed Rs.2,00,000/- (amended vide RBI Notification dated May 19, 2021) at any point of time.
4. The funds can be transferred ‘back to source’ or ‘own bank account of the PPI holder’.
5. They shall have ‘pre-registered beneficiaries’ facilities where the transfer limit shall not exceed Rs.1,00,000/- per month per beneficiary (subject to any limits drawn by the issuer).
6. The funds transfer limits for all other cases shall be restricted to Rs.10,000/- per month. There is no separate limit on purchase of goods and services using PPIs (subject to any limits drawn by the issuer).
7. PPI issuers shall clearly indicate these limits to the PPI holders and also provide necessary options to PPI holders to set their own fund transfer limits.
8. PPI issuers shall also give an option to close the PPI and transfer the balance as per the applicable limits of this type of PPI.
9. For this purpose, the Issuers shall provide an option, including at the time of issuing the PPI, to the holder to provide details of pre-designated bank account or other PPIs of same issuer (or other issuers as and when permitted) to which the balance amount available in the PPI shall be transferred in the event of closure of PPI, expiry of validity period of such PPIs, etc.The feature of cash withdrawal is now permitted (vide RBI Notification dated May 19, 2021) in respect of full-KYC PPIs issued by non-bank PPI issuers as well. However,    the following conditions are to be fulfilled:
10. Maximum limit of ₹2,000 per transaction with an overall limit of ₹10,000 per month per PPI;
11. All cash withdrawal transactions performed using a card / wallet, shall be authenticated by an Additional Factor of Authentication (AFA) / PIN;
12. Any PPI issuer offering this facility shall put in place proper customer redressal mechanisms. Complaints in this regard shall fall under the ambit of the respective ombudsmen schemes and instructions on limiting liability of customers; and
13. PPI issuers shall put in place suitable cooling period for cash withdrawal upon opening the PPIs or loading / re-loading of funds into PPIs to mitigate the risk of fraudulent use of PPIs. The cash withdrawal limit from PoS using debit cards and open system prepaid cards issued by banks in India has also been rationalised to ₹2,000 per transaction within an overall monthly limit of ₹10,000 across all locations.

PPIs up to Rs. 10,000/- with loading only from bank account:

1. They are similar to the minimum detail PPI except that they are reloadable in nature, but the Loading / Reloading shall only be from a bank account and / or credit card.
2. The amount loaded during any month and the amount outstanding at any point of time in such PPIs shall not exceed Rs.10,000 and the total amount loaded during the financial year shall not exceed Rs.1,20,000.
3. These PPIs shall be used only for purchase of goods and services and not for funds transfer.
4. PPI issuers shall provide an option to close the PPI at any time and also allow to transfer the funds ‘back to source’ (payment source from where the PPI was loaded) at the time of closure.

Open system PPIs after completing KYC of the PPI holder:

1. Only banks shall be permitted to issue these after completing KYC of the PPI holder.
2. These are reloadable in nature and issued only in electronic form, including cards.
3. The amount outstanding shall not exceed Rs.2,00,000/- (amended vide RBI Notification dated May 19, 2021) at any point of time.
4. The funds can be transferred ‘back to source’ (payment source from where the PPI was loaded) or ‘own bank account of the PPI holder’ (duly verified by the Issuer) (subject to any limits drawn by the issuer).
5. PPI issuers shall provide the facility of ‘pre-registered beneficiaries’ whereby the PPI holder can register the beneficiaries by providing their bank account details, details of PPIs issued by same issuer (or different issuers as and when permitted), etc.
6. In case of such pre-registered beneficiaries, the funds transfer limit shall not exceed Rs.1,00,000/- per month per beneficiary (subject to any limits drawn by the issuer).
7. The funds transfer limits for all other cases shall be restricted to Rs.10,000/- per month.
8. Funds transfer from such PPIs shall also be permitted to other open system PPIs, debit cards and credit cards as per the limits given above. There is no separate limit on purchase of goods and services using PPIs and PPI issuer may decide limit for these purposes within the overall PPI limit.
9. PPI issuers shall clearly indicate these limits to the PPI holders and also provide necessary options to PPI holders to set their own fund transfer limits.
10. PPI issuers shall also give an option to close the PPI and transfer the balance as per the applicable limits of this type of PPI.
11. For this purpose, the Issuers shall provide an option, including at the time of issuing the PPI, to the holder to provide details of pre-designated bank account or other PPIs of same issuer (or other issuers as and when permitted) to which the balance amount available in the PPI shall be transferred in the event of closure of PPI, expiry of validity period of such PPIs, etc.

Apart from the above-mentioned categories and types of PPIs, there are specific categories of PPI such as:

Gift instruments:

Banks and non-bank entities are permitted to issue prepaid gift instruments subject to the following conditions:

1. Maximum value of each prepaid gift instrument shall not exceed Rs.10,000/-.
2. The instruments are not reloadable.
3. Cash-out or refund or funds transfer shall not be permitted for such instruments.
4. KYC details of the purchasers of such instruments shall be maintained by the PPI Issuer. Separate KYC would not be required for customers who are issued such instruments against debit to their bank accounts and / or credit cards in India.
5. The gift instruments may be revalidated (including through issuance of new instrument) as per the Board approved policy of the issuer.

PPIs for Mass Transit Systems (PPI-MTS):

1. These semi-closed PPIs shall be issued by mass transit system operators after authorisation to issue and operate such PPIs under the PSS Act.
2. They shall contain the Automated Fare Collection application related to the transit service.
3. Apart from the mass transit system, such PPI-MTS shall be used only at other merchants whose activities are allied / related to or are carried on within the premises of the transit system.
4. The issuer may decide about the customer details, if any, required to be obtained for issuance of such PPIs.
5. They are reloadable in nature
6. The maximum value outstanding in PPI cannot exceed the limit of Rs. 3,000/- at any point of time.
7. Cash-out or refund or funds transfer shall not be permitted from these PPIs.
8. Other requirements such as escrow arrangement, customer grievance redressal mechanism, agent due diligence, reporting and MIS requirements, etc. applicable to issuance of PPIs shall be applicable.
9. These PPIs may be revalidated (including through issuance of new instrument) as per the Board approved policy of the issuer.

RBI also permits conversion of existing PPIs as explained below:

1. PPI holders can convert existing semi-closed and open system PPIs issued to them (as per various types / categories) into any type of the PPIs.
2. However, for example, if any of the existing PPIs is converted into KYC compliant semi-closed PPI, then the same is to be done only after completing the KYC of the PPI holder.
3. PPI issuers shall separately maintain the data relating to migration of existing PPIs for submission of the same to RBI, as and when required.

After understanding the various categories and types of PPIs that are specifically laid out by RBI, it is important to understand the variants that PPIs can take in our day-to-day activities. These variants can mostly be categorized under the broad types of PPIs (Closed System PPIs, Semi-closed system PPIs and Open system PPIs) as defined by RBI.

PPIs can be issued as smart cards, swipe cards, internet accounts, e-wallets, mobile accounts, mobile wallets, paper vouchers and any such instruments used to access the prepaid amount. Mobile prepaid instruments are prepaid talk-time instruments issued by mobile service providers. This talk-time value can also be used to purchase ‘value added service’ from the mobile service provider or third-party service providers.

Since PPIs facilitate purchase of goods and services, financial services, remittance facilities and transfer of funds, it can also include payment services such as BHIM, Billdesk, Paytm.

Further, PPIs can be in the form of various types of vouchers such as:

1. Paper based vouchers: Meal vouchers and Purchase vouchers.
2. Electronic based vouchers: E-com vouchers such as Paytm/Amazon vouchers.
3. Discount vouchers: Discount provided on specific items or all items offered by the seller to the buyer that are to be used at a later point of time. These may be conditional / non-conditional.
4. Cash vouchers or Coupons: A piece of paper or a digital code that can be used in exchange for cash. May it be online or otherwise, it can be used in place of money. These are also known as gift vouchers as they can be gifted and used by a third party at a later point of time to purchase from the same supplier.
5. E-Wallets: Instruments where money can be loaded and used for payments online for purchase of goods or services.

LEGISLATIVE ANALYSIS

Let us now look at the GST ecosystem and try to combine what is set out in the GST Legislation to the Master Directions in the RBI circular on a holistic basis.

Pre-paid instruments and vouchers and e-wallets have gained popularity in the last decade, the taxability of the same needs to be analysed under the GST law. At the outset, it is imperative to understand the coverage of transaction in ‘money’ since many of the PPI instruments that has been explained and defined by RBI takes the color and obligations for what Money stands for. ‘Money’ has been explicitly carved out from definition of ‘good’ and ‘service’. The extract of the same is reproduced hereunder:

“2(52) ‘goods’ means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”

“2(102) ‘services’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged”

Further, taxability of goods / services come into picture when the same are supplied under section 7 of CGST Act, the extract is as under:

“7(1)(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”

On a conjoint reading of the aforesaid provisions, it is reasonable to say that money does not qualify to be a ‘supply’ and hence kept outside the purview of GST. We can infer money per se can either neither treated as goods nor as services. Money per se is kept out of the GST ecosystem.  It is equally important to bear in mind here that any activity that relates to use of money, its conversion to any other form can be treated as a service and would be treated as exigible to GST.

To Reiterate, the activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged amounts to service being provided and therefore such consideration is leviable to GST. In short, any transaction in money per se does not fall within the purview of being exigible to GST.  Any service fee or by whatever name the same may be called for use of various forms of accepted legal tender will be subjected to GST as the case may be.

Now, it is necessary to determine as to what construes as ‘money’ under the GST law. The same has been defined as per section 2(75) of the CGST Act, extract as under:

“2(75) money means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value”

PPIs of various forms such as coupons, vouchers, e-wallets etc. are essentially defined by RBI as payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.

It is therefore pertinent to note that PPIs being instruments recognized by RBI and used for electronic remittances, it can fit into the definition of ‘money’ under the GST law and therefore is kept outside the purview of ‘supply’ and thereby the levy of GST.   

Vouchers/Gift Cards

Vouchers, which form part of PPI, have been specifically defined under the GST Act under section 2(118), extract as below:

“an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument”

From the above, it can be interpreted that vouchers are instruments that may be of two types:

Conditional: These vouchers may set out clearly the pre-agreed terms and conditions with clear indication on the instrument itself or in any other document. These can be used to make purchases from a particular supplier. An example for the same would be a Shopping voucher that can be used at specific outlets/stores. These instruments can be said to be closed system PPIs as these PPIs are issued by an entity for facilitating purchase of goods and services from that entity only and cannot be used for payments or settlements for third party services.

Non-conditional: These kinds of vouchers also set out the pre-agreed terms and conditions but the same may be used to buy from different suppliers. An example for the same would be an Amazon/Flipkart voucher where the same can be used to buy from various suppliers that supply on their platform. These instruments can be said to be semi-closed system PPIs as these PPIs are used for purchase of goods and services but at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer to accept such a PPIs as payment instruments.

However, both these kinds of vouchers, have the following features:

1. It must be an instrument.
2. There must be an obligation on the part of the supplier to accept the instrument.
3. The instrument must be accepted as consideration or part consideration.
4. There must be an indication of the goods or services to be supplied or the identities of their potential suppliers, on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.

Creation of an Obligation or creation of a consideration

Applying the rule of Noscitur a sociis, wherein the meaning of a word is determined by the words surrounding it or can be gathered from the context in which it is used, we can understand the meaning of the word obligation in a context that it is not a legal obligation that is created on issuance of an instrument, but an obligation between the buyer and the seller to accept such an instrument as consideration or part consideration against the supply of goods or services.

We need to demarcate between creating an obligation and creating a consideration. In most scenarios, when a voucher is purchased from outlets, the same can be redeemed (within the

given time frame), the same is a PPI but is does not create an obligation from the supplier. The same is used as an accepted mode of payment and shall be treated as equivalent to money and therefore not liable to GST.

Similarly, in case of e-wallets the recharge is a mere transfer of money and not a voucher, there is no obligation that arises as a result of such transfer. Thus, the same cannot be liable under GST.

Where the voucher is issued by the supplier on his own accord or under a scheme/contract, there is a creation of obligation in the hands of the supplier. Since such an obligation is created between the buyer and the potential supplier, it is very important on the part of the issuer of such instrument to indicate the identities of potential suppliers in the instrument itself.

Whether such an instrument is closed or semi-closed system PPI i.e., whether such a voucher is conditional or not, it is important to note that there exists an obligation on the part of the supplier. The supplier may however be the issuer of voucher itself or other potential suppliers as indicated in the voucher.

However, as clearly set out in the definitions above, money includes Indian legal tender. Legal tender has been explained by the RBI as a coin or a banknote that is legally tenderable for discharge of debt or obligation. Similarly, the value stored on instruments such as a PPI, is equivalent to money.

Therefore, the legal tender used in India forming part of money, and the value stored on a PPI equivalent to money, both cannot be said to be an obligation created between a buyer and seller but is an obligation that is created by the Sovereign State itself to be accepted as a consideration.

We can draw an inference from the above that a voucher is only an instrument to be accepted as a consideration or a part of the consideration that is used for the purchased of goods or services and is neither to be treated as a supply of good or service.

While it could be construed that a voucher is issued in the course and furtherance of business and therefore issuance of voucher will construe as supply, it is also equally important to understand that it will be so that case only from the reading of the time of supply as would be applicable to the issuance of vouchers per se.  

As vouchers are defined to fall under the levy of GST, it is necessary to determine at what point tax has to be discharged on a voucher, section 12(4) of CGST Act provides for the time of supply of the vouchers. If the supply of goods/services is identifiable at the time of issue of voucher, then the time of supply would be the date of issue of voucher and in all other cases, it would be the date of redemption of such voucher.

TIME OF SUPPLY

When the taxability arises on the supply under GST, the trigger to discharge such liability arises at the time of supply of such goods or services.

Time of Supply for goods

Sec 12 of the CGST Act, 2017 provides for the time of supply in case of goods. The liability to pay tax on goods shall arise shall be determined as per sub-section 2 of Sec 12.

“The time of supply of goods shall be the earlier of the following dates, namely:—

(a) the date of issue of invoice by the supplier or the last date on which he is required, under section 31, to issue the invoice with respect to the supply; or

(b) the date on which the supplier receives the payment with respect to the supply

Provided that where the supplier of taxable goods receives an amount up to one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice in respect of such excess amount. Explanation 1.––For the purposes of clauses (a) and (b), ―supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment.

Explanation 2.––For the purposes of clause (b), ―the date on which the supplier receives the payment shall be the date on which the payment is entered in his books of account or the date on which the payment is credited to his bank account, whichever is earlier.”

Therefore, from the above we understand that the time of supply in relation to goods shall be the earliest of-

1. Date of issue of invoice
2. Last date on which invoice should be issued
3. Date of receipt of payment for the said supply

Time of Supply for Services

Sec 13 of the CGST Act, 2017 provides for the time of supply in case of supply of services. The liability to pay tax on supply of services shall arise shall be determined as per sub-section 2 of Sec 13.

“The time of supply of services shall be the earliest of the following dates, namely:—

 (a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under section 31 or the date of receipt of payment, whichever is earlier; or

(b) the date of provision of service, if the invoice is not issued within the period prescribed under section 31 or the date of receipt of payment, whichever is earlier; or

(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply

Provided that where the supplier of taxable service receives an amount up to one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice relating to such excess amount.

Explanation.––For the purposes of clauses (a) and (b)–– (i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment;

(ii) ―the date of receipt of payment‖ shall be the date on which the payment is entered in the books of account of the supplier or the date on which the payment is credited to his bank account, whichever is earlier.”

Therefore, from the above we understand that the time of supply in relation to services shall be the earliest of-

1. Date of issue of invoice
2. Date of receipt of payment for the said supply
3. Date of provision of service (when invoice is not issued with the prescribed period)

Time of Supply in case of Vouchers

The time of supply for vouchers have be laid down in Sec 12(4) of the CGST Act, 2017 wherein the time of supply shall be the-

1. Date of issue of such voucher, if the supply is identifiable at that point or
2. The date of redemption of voucher in all other cases.

When it is not possible to determine the time of supply under the sub-section 2 and 4 of Sec 12 or 13, then the time of supply to be considered as-

1. The date of filing the period return where the same is required
2. In any other case the date on which tax is paid

From the time of supply provisions as set out above in relevance to vouchers, it can also be seen that the legislation is referring to the time of supply as the date of redemption of voucher in cases where the supply is not identifiable at the point of date of issuance of the voucher. It is not the case where the voucher is to be subjected to GST once and the goods or supply of services be subjected to GST once again that would lead to a situation of double taxation on the same transaction where the issuance of the voucher is only in the form of a pre-paid instrument that may take the colour of an acceptable consideration.

Further, with respect to Gift cards/ Gift vouchers, the following points may be noted:

1. Gift cards / Gift vouchers can be loaded with value that can be redeemed for purchase only at designated stores specified.
2. The service fee on such gift cards varies depending on the actual load value of the Gift cards sold to the customers.
3. Gift cards / Gift vouchers are instruments accepted as consideration/part consideration while purchasing the goods from the issuer and the identity of the supplier is established in the Gift card / Gift voucher.
4. Therefore, Gift cards / Gift vouchers squarely fall under the definition of ‘voucher’ as defined in section 2(118) of CGST Act as above and are leviable to GST.

Digital Wallets/E-Wallets

Digital Wallets/E-Wallets have tremendously gained popularity especially post demonetisation. Most common digital wallets also known as e-wallets are Paytm, Amazon Pay, Freecharge, Google Pay, Mobiwik, PhonePe and the same are authorized payment systems by RBI. These are into providing services of simplifying the process of money transfer through their website/application. Though the primary function of these applications is to allow simple money transfer transactions, it also allows the users to make payments in stores that accept UPI-based transactions.

The services provided by such digital wallets fits the definition of ‘money’ as per GST under the category of ‘electronic remittances.’ Therefore, these PPIs can be said to be outside of levy of GST.

With the growing acceptance of PPIs in e-commerce payments, including in digital marketplaces, the payment mechanism is often facilitated using the services of payment aggregators (such as Billdesk, Instamojo etc / payment gateways such as Paytm, PayPal, Razorpay etc). In such scenarios, the emerging practice observed is that the PPI issuer has the necessary agreements with the digital marketplace and / or the payment aggregator / gateway rather than the individual merchants who are accepting the PPIs issued by the Issuer as a payment instrument. In view of the above, PPI issuers shall obtain an undertaking from the digital marketplace and / or payment aggregator / gateway that the payments made by the Issuers are used for onward payments to the respective merchants.

These PPIs facilitate electronic remittances and are like e-wallets discussed above. Therefore, services provided by such PPIs can be included in the definition of ‘money’ as per GST under the category of ‘electronic remittances’. Therefore, these PPIs can be said to be outside of levy of GST.

Criteria for Taxability of PPI’s

Since various PPIs have different criterion for it to fall under the levy of taxes, let us understand a few characteristics of PPIs that make the same taxable or not:

Criteria for taxability:

1. There must be an obligation to accept it as consideration/part consideration for supply of goods/services.
2. It must be an obligation created between the buyer and supplier of goods/services.
3. The identities of their potential suppliers are either indicated on the instrument itself or in related documentation.
4. The terms and conditions of use of such instrument must be indicated on the instrument itself or in related documentation.
5. If such instruments are construed to be ‘goods/services’.

Criteria for non-taxability:

1. If an instrument creates an obligation under the Sovereign State to be accepted as consideration/part consideration.
2. If the said instrument is to be held as a monetary instrument in terms of the Master Directions set out by the Reserve Bank of India.

Further, reliance may be placed on certain judicial interpretations with respect to such PPIs to understand it better.

JUDICIAL INTERPRETATION

Judgement in relation to meal vouchers under the erstwhile indirect taxes: Sodexo Svc India Pvt Ltd’ vs State of Maharashtra dated December 9, 2015 (Civil Appeal Nos. 4385-4386 of 2015):

Facts of the case: ‘Sodexo Svc India Pvt Ltd’ (“Sodexo”) is into the business of providing pre-printed meal vouchers with the nomenclature of ‘Sodexo meal vouchers’. The meal vouchers are issued by Sodexo to its customers which are establishments and companies. The establishments or companies provide these vouchers to their employees to be used for purchasing food/meals and other items up to a certain amount. For procuring such items on presenting the vouchers, Sodexo has arrangements with various restaurants, departmental stores, shops etc (“affiliates”). On receiving such vouchers, the affiliates are entitled for reimbursement of the face value of the vouchers by Sodexo. Sodexo charges its customers and its affiliates a certain amount as service charges for providing payment services through these meal vouchers. Sodexo pays service tax in respect of the same.

Issue in hand: Whether these vouchers can be treated as ‘goods’ for the purpose of levy of Octroi or Local Body Tax (“LBT”) by the Municipal Corporation, or the aforesaid activity only amounts to rendering ‘service’ by Sodexo. (Octroi or LBT being a tax ‘on the entry of goods into the limits of the city’, which goods are meant for ‘consumption, use or sale therein’)

With the above background of the case, let us understand in the context of the note, if such paper-based meal vouchers having the nature of a closed or a semi-closed system PPI, would be considered as ‘goods’ and if it would be subject to taxes.

Arguments: 

1. Sodexo argued that it was providing services to the establishments with whom it had entered into contracts and therefore such agreements were for service and not for sale of any goods.
2. The High Court of Bombay however negated the argument, by holding that such vouchers are capable of being sold by Sodexo after they are brought into the limits of the city. They are capable of being paid or sold and of being delivered, stored and possessed. Therefore, the Municipal Corporation is justified in levying Octroi.

Findings of the Court:

1. The intrinsic character of the transaction is to provide services by Sodexo and this is achieved through the means of vouchers. It is the affiliates who are getting money for those goods and not Sodexo, who only gets service charges for the services rendered to its customers and affiliates.
2. These vouchers are non-transferrable.
3. An insight into the RBI guidelines (dated March 28, 2014) to regulate such transactions bears out that the real nature of this transaction is to provide service and by no stretch of imagination these vouchers can be termed as ‘goods’.
4. The real character of the transaction is that is it an expenditure in hands of Sodexo’s customers (employers) and an amenity in hands of their employees. It is a perquisite given by adopting the methodology of vouchers and for its proper implementation, services of Sodexo are being used.

Judgement: The Supreme Court held that the Sodexo meal vouchers are not ‘goods’ for the purpose of levy of Octroi or LBT.

Judgement in relation to gift vouchers / gift cards under GST: ‘Kalyan Jewellers India Ltd’ – Authority for Advance Ruling (“AAR”) Order No.52/ARA/2019 dated November 11, 2019 and Appellate Authority for Advance Ruling (“AAAR”) (Appeal No. TN/AAAR/11/2021(AR) Order dated 30/03/2021:

Though an advance ruling is to be made applicable only to the facts of the case on hand as that of the applicant to the applicant only, it is pertinent to note the way the findings of the Authority of the Advance ruling held and equally and more pertinent to note the findings of the Appellate authority for Advance Ruling.

Facts of the case: Kalyan Jewellers introduced the facility of issuing PPIs as a part of sales promotion. They dealt with closed and semi-closed PPIs. These PPIs are called ‘gift vouchers/gift cards’ in trade parlance.

Issue in hand: The company approached the Authority for Advance Ruling (“AAR”) seeking a ruling on

1. Whether these PPIs are to be treated as supply of goods/services.
2. If yes, then should the time of issue of PPIs be taken as the time of supply of goods/services.
3. The applicable rate of GST.

1. With the above background of the case, let us understand in the context of the note,

whether closed and semi-closed PPIs such as gift vouchers / gift cards fall under the definition of goods/services and whether it is leviable under GST.

Arguments:

1. Kalyan Jewellers stated the following to argue that these PPIs were not goods:
2. The PPIs are actionable claims under Transfer of Property Act where Civil courts recognize these as per the above Act.
3. The PPIs are equivalent to money.
4. They also stated the following to argue that these PPIs were not services:
5. Mere transaction of money or actionable claim
6. No service was involved and no service tax leviable
7. They stated since the PPIs are not goods/services, GST would be charged only when these PPIs are redeemed.

Findings:

1. Since Kalyan Jewellers itself issues the gift vouchers, either by itself or through an agent, the PPIs are closed system PPIs.
2. The gift card / gift voucher is not a claim to a debt, nor does it give a beneficial interest in any movable property to the bearer of the instrument.
3. It is not an actionable claim as defined under Transfer of Property Act
4. It is an instrument accepted as consideration/part consideration while purchasing the goods from the issuer and the identity of the supplier is established in the PPI.
5. Therefore, these PPIs squarely fall under the definition of ‘voucher’ as defined in section 2(118) of CGST Act.

Judgement:

1. The AAR therefore held that vouchers constitute supply of ‘goods’.
2. The time of supply of such gift vouchers / gift cards shall be the date of issue of vouchers, if the vouchers are specific to any particular goods specified against the voucher.
3. If the gift vouchers / gift cards are redeemable against any goods bought, the time of supply shall be the date of redemption of voucher.
4. The rate of GST in case of paper-based gift vouchers would be 12%.
5. The rate of GST for gift cards with a magnetic strip or a chipset would be 18%.
6. Aggrieved by the above ruling, Kalyan Jewellers applied to the AAAR for the same issue. The AAAR held that the GST law recognises such vouchers as an instrument of consideration (non-monetary form) for future supply.
7. The classification of the voucher would depend on the nature of goods / services supplied in exchange for the voucher issued earlier.
8. The time of supply shall be the date of issue of such vouchers
9. The applicable rate of GST would be that which is applicable to the goods

The very critical pointers that emerge from the order of the appellate authority for advance ruling in the case are as below-

1. In the case of vouchers issued in India, it is important to cross link the same with that of the Master Directions issued by the Reserve Bank of India in addition to the relevant contractual terms under which the vouchers are issued.
2. The law provides for taxing the supply of vouchers at the time of issuance of vouchers when the supply is clearly known at the time of issuance.

That double taxation is to be avoided in ensuring that both the supply of vouchers as well as supply of the goods are not taxed in as much as the vouchers are be taxed only for the underlying supply of goods per se.

It is also heartening to note that the appellate authority themselves have held that the vouchers are neither a goods nor a service that it is a means for payment of consideration.

CONCLUSION … or atleast as close to a conclusion as it would be possible

The treatment of various instruments discussed in the note, may be determined by understanding its nature. Some instruments along with their treatment under GST have been tabulated below.

As the saying goes there is no one shoe that fits all sizes. When we discuss about a Prepaid Instrument including a voucher, we have to go through the typical features of the same, the contractual terms between the issuer and the supplier and the holder and the redeemer. We also have to look at it as to which bucker of a PPI it would fall under in terms of the Master Directions as set out by the Reserve Bank of India. It would be almost injustice to look at the PPI only from a GST ecosystem perspective.

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