The Central Board of Indirect Taxes and Customs (CBIC) has issued a crucial clarification regarding the taxation of gift cards and prepaid vouchers, announcing that these will not be subject to Goods and Services Tax (GST).
This clarification extends to prepaid instruments, such as gift cards and digital wallets, following a classification by the Reserve Bank of India (RBI).
According to the RBI, these vouchers are considered as prepaid instruments, and as a result, they are categorized as 'money' under the GST framework rather than goods or services, thus exempting them from GST.
In addition to prepaid vouchers, non-prepaid vouchers—which do not qualify as prepaid instruments but confer the right to receive goods or services—will also not be taxed under the GST regime.
The Central Board of Indirect Taxes and Customs (CBIC) clarified that these vouchers fall under the category of "actionable claims" as per the GST Act. Therefore, the transactions involving these vouchers are not treated as the supply of goods or services, making them exempt from GST.
While prepaid and non-prepaid vouchers are exempt from GST, it is important to note that the goods or services redeemed using these vouchers may still be subject to GST. As per the law, the goods or services received in exchange for these vouchers are considered taxable, and the appropriate GST will be levied on them.
The CBIC also shed light on the GST treatment of different voucher distribution models. In a principal-to-principal model, where distributors purchase vouchers from issuers at discounted prices and subsequently sell them to sub-distributors or customers, the transaction will not attract GST. This model primarily involves the sale of vouchers as a form of payment.
However, in a commission-based model, where distributors or agents act on behalf of the issuer and are paid a commission or fee for their services, the transaction is considered a service. As a result, the distribution of vouchers in this model will be subject to GST.
The CBIC also provided clarity on how unused vouchers should be treated under the GST framework. If a voucher expires without being redeemed (referred to as "breakage"), it will not constitute a supply of goods or services. Hence, the money from unredeemed vouchers will not be liable to GST, ensuring that businesses do not have to pay tax on funds not used for purchases.
Vivek Jalan, Partner at Tax Connect Advisory Services LLP, shared further insights on the classification of vouchers under GST. He explained that vouchers are classified as pre-payment instruments by the Reserve Bank of India (RBI), and this classification creates an obligation for the supplier to accept them as payment for goods or services. "If a customer buys a ₹10,000 voucher for a store, GST applies to the goods purchased, not the voucher itself," Jalan added, emphasizing that it is the final purchase that attracts GST, not the voucher transaction.
Distributors offering additional services such as advertising or customer support to voucher issuers will also face GST charges. The service fee charged for these value-added services will be liable to GST at the applicable rates. The CBIC has made it clear that while the sale of vouchers itself is exempt from GST, any associated services like these are subject to tax.
Prepaid vouchers and gift cards are exempt from GST as per the new CBIC clarification.
Non-prepaid vouchers are also exempt from GST, as they fall under the category of "actionable claims."
Goods or services redeemed using vouchers may still attract GST.
GST applies to commission-based distribution models, but not to principal-to-principal models.
Unused vouchers (breakage) are exempt from GST.
Additional services offered by distributors will be subject to GST.
The recent clarification by the Central Board of Indirect Taxes and Customs (CBIC) brings much-needed clarity regarding the taxation of gift vouchers and prepaid instruments under GST. As per the new guidelines, both prepaid vouchers (including gift cards and digital wallets) and non-prepaid vouchers are exempt from GST, provided they do not qualify as the supply of goods or services. However, it's important to note that while these vouchers themselves are not taxed, the goods or services redeemed using them may still attract GST.
The CBIC's insights into voucher distribution models offer further clarity. Transactions based on principal-to-principal distribution models will remain exempt from GST, while commission-based models will be subject to GST due to the nature of the service provided. The treatment of unused vouchers, or "breakage," also ensures businesses do not incur unnecessary tax liabilities.
With expert input reinforcing the RBI’s classification of vouchers as prepaid instruments, businesses and consumers alike are now better equipped to navigate the tax implications surrounding voucher transactions. This clarification is a significant step toward simplifying voucher taxation and enhancing transparency in the market.