GST Update No 293 on availability of ITC on vouchers of loyalty points

The dispute as regards to admissibility of input tax credit on vouchers and subscription packages procured by the applicant from third party vendors for providing loyalty and reward points has been a matter of discussion since erstwhile indirect tax regime. The tug of war between the department and the taxpayers has now become a never-ending task wherein the departmental authorities are not willing to provide input tax credit on the same while taxpayers argue that it is admissible being a promotional expenditure incurred during the course of business. Recently, one more case was reported on parallel lines before Karnataka AAR in the case of M/S MYNTRA DESIGNS PRIVATE LIMITED. The analysis of this decision is the subject matter of discussion of our present update.
The applicant is a major fashion e-commerce company and owns e-commerce portal, engaged in the business of selling of fashion and lifestyle products. The suppliers intend to sell such products by listing them on portal and thereafter sell the product. Once the order is placed, the applicant collects money and settles the amount payable with the supplier. The applicant in order to increase the customer base and footfalls, proposes to run a loyalty program by issuing points to the customer on the basis of purchases effected to them. The participation in the said scheme shall be based on pre-defined eligibility criteria laid down by the applicant and the customer will be bound to accept the same. The advance ruling was therefore sought by the applicant as to whether the applicant would be eligible to avail input tax credit as per Section 16 on the vouchers and subscription packages procured by applicant from third party vendors that are made available to the eligible customers participating in loyalty programs.
The applicant procures the vouchers and subscription packages from third party vendors upon payment of GST and provide them to the customers. The applicant themselves is not engaged in business of supply of said vouchers andthe packages. The vendors will be raising invoices by classifying their outward supply as “other professional, technical and business services”. The expenditure incurred by the applicant in this respect is not capital expenditure and therefore, allowed under section 37(1) of Income Tax Act under “Profits and gains of business or profession”.The applicant referred to the definition of voucher and submitted that the time of supply would be date of issuance of voucher and hence, GST shall be levied accordingly. The applicant placed reliance on provisions of Section 16 of the Act and submitted that they are eligible to avail input tax credit on the same since, all the conditions of Section 16 are fulfilled. Further, it was submitted that procurement of voucher is “in the course of furtherance of business”. Further, the input tax credit on the same is not restricted or blocked as per Section 17 of the Act. It was further contended that vouchers shall be made available to the customers who wish to redeem the loyalty points and no monetary consideration will bereceived in place from the customer. Further, the loyalty points are not transferrable and cannot be converted into cash and used in place of cash. It was also argued that loyalty program ispurely commercial driven. Further, the input tax credit on the same is not blocked under Section 17(5)(h) of the Act, since the third party classifies the same as service and not goods and cannot be termed as “gift” also.The AAR referred to various provisions of CGST Act, 2017. It was stated that the subscription package would also qualify for the definition of voucher. Moving further, it was analysed as to whether the voucher would come under ambit of goods or services. Therefore, it was held that the said vouchers shall fall under “goods” since the definition is not restricted to “tangible” properties only. Instead, it refers to movable property which is capable of being transmitted and voucher is one of them. Further, reference was also drawn to the decision of Apex Court in the case of TATA CONSULTANCY SERVICES V/S STATE OF ANDHRA PRADESH and VIKAS SALES CORPORATION V/S CCE. Further, reference was made to Schedule II ofCGST Act, 2017 stating that the supply of voucher is supply of goods. Moreover, it was analysed that loyalty program is on basis of particular transaction which are having no monetary value and are non-transferrable. This implies that the customers shall receive the vouchers free of cost and hence, it is coveredunder the ambit of “gift” and covered under Section 17(5)(h) of the CGST Act, 2017. Therefore, it was concluded that the input tax credit on the same shall not be available.The above decision is a setback for the industry since the business houses often introduce schemes like these to increase the customer base and profit margins. Although, there had been similar decision on earlier occasion on the same line by Tamil Nadu AAAR in the case of GRB DAIRY FOODS PVT. LTD. wherein it was held that no input tax credit can be claimed on gifts and rewards given without consideration. However, the issue needs to be re-visited as the term “gift” in normal parlance means anything given without any condition or expectation in return. However, in the present case, the vouchers are conditional as they are given on customer purchasing specified quantity of goods which intent to increase the sales base. Consequently, the said vouchers should not be treated as “gift” so as to deny the input tax credit of GST paid on procurement of such vouchers. A suitable clarification in this regard from the government iseagerly awaited.

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GST Update No 293 on availability of ITC on vouchers of loyalty points

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