This article focuses on the issue raised by M/s Kalyan Jewellers Limited (‘Kalyan Jewellers’) as regards the pre-paid instruments (‘PPI’)/vouchers issued by them to their customers. The claim of Kalyan Jewellers before the Advance Authority (‘AAR’), Appellate body for Advance Rulings (‘AAAR’), and thereafter before the Madras High Court was that the PPIs/vouchers issued by them were actionable claims. And due to the exemption of actionable claims under Schedule III of the CGST Act, 2017, the supply of PPIs was not subject to GST. Section 2(1) of CGST Act, 2017 defines actionable claims to have the same meaning as assigned to them under Section 3 of Transfer of Property Act, 1882 which inter alia defines it as a claim to any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property. And Schedule III of CGST Act, 2017 – as it existed then – stated that actionable claims, other than lottery, betting and gambling shall neither be treated as supply of goods nor supply of services. AAR, AAAR, and the Madras High Court all three adopted varied perspectives on the issue, and I examine all three below.
AAR and AAAR Adopt Different Perspectives
PPIs issued by Kalyan Jewellers directly or through third party vendors could be redeemed at any store of Kalyan Jewellers across India. PPIs were purchased by customers by paying a value of money specified on the PPI, and on payment the value was loaded on the PPI. And the customers could redeem the PPI against purchase of any jewellery in any of the outlets of Kalyan Jewellers. Kalyan Jewellers’ claim was that GST was only attracted when customers redeemed their PPIs, since the goods were sold at the time of redemption of PPIs and not at the time of supply of PPIs.
AAR observed that if the customer loses the PPI or is unable to produce it before expiry it cannot be used to purchase any goods. Based on the limited use of PPI, AAR concluded that PPI was not an actionable claim but only an instrument accepted as consideration/part consideration while purchasing goods from a specific supplier whose identity was established in the PPI. AAR held that PPIs constitute vouchers as defined under Section 2(118) of CGST Act, 2017 which states as follows:
“voucher” means 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;
Relying on the above definition, the fact that PPI belongs to the customer who purchases it and is allowed to redeem it, AAR concluded that PPIs issued by Kalyan Jewellers are neither money nor actionable claims. And since other ingredients of a supply were fulfilled, the issuance of PPIs constituted as a supply.
The remaining question was that of time of supply, i.e., should GST be payable at the time of issuance of vouchers or at the time of their redemption by the customers? Time of supply where vouchers are involved is mentioned in Section 12(4), CGST Act, 2017 where it is stated that the time of supply shall be the date of issue of voucher, if the supply is identifiable at that point; or the date of redemption of voucher in all other cases. And since PPIs were redeemable against any jewellery, the time of supply in this case was held to be at the time of redemption of PPIs.
Kalyan Jewellers filed an appeal before AAAR on the ground that PPIs only had a redeemable value but no inherent value capable of being marketable for the purpose of levy of GST. Kalyan Jewellers repeated its argument that PPIs are not actionable claims or goods and if their supply is subject to GST it would amount to double taxation since GST would also be paid at the time of supply of jewellery. AAAR adopted an interesting to determine the issue. AAAR held that PPI in question was neither a good nor a service, but it was not necessary to arrive at a determination if it was an actionable claim.
AAAR categorized the PPI as a voucher, like AAR’s approach, but added its own observations. AAAR held that voucher is just means of an advance payment of consideration and per se it is neither a good nor a service. (para 7.9) It clarified that there was no issue of double taxation for if GST was levied at the time of issuance of PPI no GST would be payable at the time of its redemption. And whether supply of PPIs is taxable at the time of their supply or their redemption would be determined by the fact if the underlying supply is identifiable at that point. AAAR concluded that since the PPIs mentioned that they can be redeemed against gold jewellery at a known rate of tax, they were taxable at the time of their supply. (para 7.11) And since the PPI was neither a good or a service, it was classifiable as per the goods or services supplied on its redemption.
It is interesting to note that Kalyan Jewellers was insistent that their PPIs be classified as actionable claims and not be subject to GST at the time of their supply but only at the time of their redemption. AAR and AAAR pretty much sidestepped the issue of actionable claim. Both the AAR and AAAR made one common observation, and in my view correctly so, that PPIs satisfied the definition of voucher and were means of consideration, treating the issue of whether PPIs were actionable claims as incidental and almost unnecessary.
Madras High Court Goes a Step Ahead
One would assume that AAAR’s succinct and accurate identification of PPI as vouchers would end the matter of taxability of PPIs issued by Kalyan Jewellers; but, that was not to be. Kalyan Jewellers appealed AAAR’s appealed before the Madras High Court and made similar arguments and claims it made before AAR and AAAR, i.e., PPIs issued by it were actionable claims and were subject to GST only at the time of their redemption and not at the time of their issuance. (paras 12-13)
Madras High Court went a step further than both AAR and AAAR to interpret the definition of voucher, actionable claims and debt in significant detail and referred to the relevant provisions of Transfer of Property Act, 1882, General Clauses Act, 1897 and the Educational Guide issued under Finance Act, 1994. The High Court concluded that the PPIs issued by Kalyan Jewellers were a debt instrument as they acknowledged debt and could be redeemed on a future date towards sale consideration on purchase of any merchandise from the Kalyan Jewellers outlet. And if Kalyan Jewellers refused to redeem the value of PPI, the customer would have a right to enforce.
Another factor that influenced the Madras High Court’s conclusion that PPI was an actionable claim was its attention to the fact that while the PPIs issued by Kalyan Jewellers mentioned that the customers would not be entitled to refund if PPIs expire before redemption, the said condition was not in accordance with RBI’s Master Directions on PPIs. The High Court clarified that even if the PPI expires before the customer claims refund, the customer would be entitled to claim refund. Accordingly, the High Court clarified that:
The “Gift Voucher/Card” is a debit card. It is like a frozen cash received in advance and thaws on its presentation at the retail outlet for being set off against the amount payable by a customer for purchase of merchandise sold by the petitioner or the amount specified therein is to be returned to the customer as per RBI’s Master Direction where a customer fails to utilize it within the period of its validity. (para 72)
While the Madras High Court held that the PPI was an actionable claim, it also partially endorsed the AAAR’s approach that there was no need to determine if the voucher was an actionable claim to conclude that it was neither a good nor a service. As per the High Court it was sufficient to state that since PPIs were actionable claims, they were ‘as such’ not liable to taxation themselves, but only the underlying transactions were taxable. Here again, the implication of PPIs being not liable to GST as such is not clear, since PPIs are anyways liable to tax only in reference to the supply of goods or services that they facilitate. So while the High Court did finally endorse PPIs as actionable claims, it did not, and as per me, will not materially affect their taxability.
Finally, the High Court’s conclusion was correct as it clarified that the PPI/voucher being the means of consideration could not be subject to GST, but only the goods or services purchased via it were taxable. Of course, presuming the other prescribed ingredients of supply were satisfied. (paras 79-80) As regards the time of supply, the High Court’s opinion was similar to that AAR and AAAR and there was no substantial change i.e., if goods were identifiable at the time of supply of vouchers that would constitute as time of supply else time of supply would be the date of redemption of vouchers.
Is the Dust Settled on GST Implications of Vouchers?
Has the Madras High Court’s opinion finally settled the dust on PPIs and their status as actionable claims under GST? I doubt it. The High Court in its decision cited the Karnataka High Court’s decision in M/s Premier Sales Promotion Pvt Ltd, where the latter made two observations that are slightly at odds with the impugned decision. The Karnataka High Court observed that PPIs do not have any inherent value of their own but are instruments of consideration and would fall under the definition of money under CGST Act, 2017. And money has been specifically excluded from the definition of both goods and services. (para 16) Second, the Karnataka High Court held that the issuance of PPIs was akin to a pre-deposit and their issuance did not amount to supply. (para 22) The Madras High Court cited the latter observations of the Karnataka High Court. (para 96) But, the Madras High Court never indicated if it agreed or disagreed with the Karnataka High Court’s approach. And, the difference in opinion of both the High Courts raises the question if PPIs are better classified as money or actionable claims?
One way to understand this issue is by viewing vouchers as a sub-category of money. Vouchers serve the purpose of consideration or part consideration for goods or services while money, in its traditional form, also performs the same function. PPIs are also typically instruments or forms of consideration. And since PPIs also typically contain identities of suppliers, they tend to satisfy all ingredients of a voucher as in the impudnged case and are better understood as such. While the current divergence between the two High Courts on the actual character of PPIs, did not create any immediate implications in both cases, since both money and actionable claims are outside the purview of GST per se. The divergent interpretations of both the High Courts may present hurdles going forward and will require some reconciliation.
Conclusion
On balance, the Madras High Court’s decision is well-reasoned and, in my view, correctly identifies the status of PPIs. The High Court could have, like the AAAR chosen to not adjudicate on the issue of whether PPIs constitute an actionable claim, since the point of their taxability could have been decided only by a reference to the definition of vouchers. However, it scrutinized the key phrases and referred to various legislations and arrived at a justifiable conclusion creating a solid anchor for jurisprudence on the issue of GST implications of PPIs.