Levying GST on atypical forms of consideration is a familiar problem under GST regime. One such problem relates to the levy of GST on vouchers issued by a supplier. While we have a modicum of certainty on the interface of vouchers and GST, on another form of consideration, i.e., loyalty points, applicability of GST remain a source of intrigue. In this article, I elaborate on some of the challenges posed by issuance of loyalty points and the unanswered questions about the levy of GST on their issuance, cancellation, among other aspects.
Identity of Loyalty Points
The first challenge is accurately identifying loyalty points. It is unclear if loyalty points can be classified as actionable claims, vouchers, or a form of money. One advance ruling relating loyalty points has stated that loyalty points, until they are valid, constitute as actionable claims. However, after their expiry period, they cease to be actionable claims. AAR’s reasoning was that after the expiry date of the loyalty points, the customer can no longer redeem them and loses any right over them. Since the customer loses the right to initiate legal action in relation to their loyalty points after their expiry, they cease to be actionable claims. AAR however, stopped short of identifying the nature of loyalty points after their expiry period. AAAR, in an appealagainst the ruling, took the same view.
During the hearing before AAR, the Revenue Department commented that loyalty points do not amount to actionable claims but chose in possession. The Department emphasized that actionable claims comprise of two kinds of claims: (a) claim to unsecured debt; and (b) claim to beneficial interest in a movable property. And argued that since the beneficial interest in movable property was in the possession of customers the loyalty points cannot be termed as actionable claims but instead should be characterized as chose in possession.
It is difficult to buy the distinction between actionable claims and chose in possession articulated by the Revenue Department. Actionable claims rarely cease to be such merely because the beneficial interest in the movable property is in the possession of the customer. Chose in possession tends to be broader concept encompassing a bundle of rights over an object, and the possession of the object is not determinative of its character. Further, the identity of loyalty points also overlaps with the definition of vouchers. Section 2(118), CGST Act, 2017 defines voucher as 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 to be supplied or identities of potential suppliers are indicated on the instrument itself. It is difficult to argue that loyalty points constitute as an ‘instrument’ and can strictly speaking, be considered as vouchers as defined under CGST Act, 2017 even though loyalty points would typically fulfil remaining ingredients enlisted in definition of the voucher.
While High Courts have termed gift vouchers as actionable claims, money, and vouchers as defined under CGST Act, 2017, it is difficult to state if loyalty points can be satisfactorily included in any one of the three categories even if they are analogous with gift vouchers often issued by suppliers to retain and cultivate loyal customers. The context and facts would require examination to accurately determine the identity of loyalty points as it is possible that they are identified in different categories depending on their nature and purpose of use.
Prima facie, it does seem that loyalty points satisfy the definition of an actionable claim. Though, if loyalty points are used in consideration or part consideration of a supply of goods or services, they can be considered as vouchers provided one adopts a broad view of what constitutes as an ‘instrument’ in the definition of vouchers. Irrespective, the identity of loyalty points under the GST regime remains an open question.
Taxation of Loyalty Points
The GST consequences of issuance, use, redemption, and expiration of loyalty points remains an equally open-ended question partially, if not substantially, because the identity of loyalty points is not established. The levy of GST in respect of loyalty points has multiple dimensions: their effect on the value of supply, time of supply, and whether the expiry of loyalty points constitutes an independent supply. The last question was the subject of attention in an advance ruling.
In the advance ruling, the applicant was responsible for managing loyalty points issued by one of its clients to its customers. The applicant charged GST on the service fee it charged its clients for managing their loyalty point program. The client used to pay the applicant Rs 0.25 per loyalty point as issuance charge. If the customer redeemed the loyalty points, the applicant would Rs 0.25 per loyalty point redeemed by the customer to the client. If the customer did not redeem the loyalty points and/or if the loyalty points expired, the applicant would forfeit and retain the amount equivalent to Rs 0.25 per loyalty point. AAR had to answer the question whether the forfeiture of amounts equivalent to expired loyalty points was consideration for actionable claims and whether it would be subject to GST? As mentioned above, AAR held that loyalty points were actionable claims until they expired but ceased to actionable claims after their expiry. AAAR held the same. The other related question was the issue of consideration. AAR held that the forfeiture of amount equivalent to expired loyalty points constituted as revenue for the applicant was issuance fee for the services it provided to its clients for managing their loyalty point programs. The forfeiture amount was consideration for supply of services to its clients in the normal course of business and was part of their remuneration. The forfeiture of expired loyalty points was termed as a supply, and their value was held part of the value of supply. AAAR similarly took the view that consideration for expired loyalty points had flown to the applicant and was its revenue for managing its loyalty point program.
The advance ruling mentioned above, dealt with specific facts where the loyalty point program of a supplier was managed by a third party. And the taxability of forfeited amount was the specific issue before the advance ruling authority. However, in case, the loyalty point program is managed in-house by a supplier would some of the answers be different? Perhaps. The answers would depend on the terms and conditions underlying the loyalty point program relating to their issuance, redemption, and expiry. Forfeiture of the loyalty points in case of in-house management would not ordinarily amount to a supply, since a third party would not be involved. Neither would any question of consideration arise in such a scenario.
In another scenario, what if the value of loyalty points reduces at stipulated dates. For example, after 24 months, each loyalty point, instead of being worth Rs 0.25 would be worth Rs 0.10. Would the difference, i.e., Rs 0.15 be treated as consideration? In case of third party managing the loyalty point program, the reduced value is likely to be forfeited by the third party, making it a supply to the extent of the reduced value. In case of in-house management of loyalty point program, the reduced value is unlikely to invite any GST consequences. But, again these are tentative answers and would require scrutiny depending on the terms and conditions of the loyalty program offered by a supplier.
Conclusion
This article is a preliminary attempt to highlight some of the GST implications and issues that may arise from the issuance, redemption, and expiry of loyalty points. The aim is to highlight a couple of issues and how the answers are not – currently – straightforward under the GST laws. A parallel aim of the article was also to highlight that loyalty points while comparable are not completely analogous to gift vouchers issued by suppliers and may require customized answers. Though gift vouchers and loyalty points may also intersect in certain circumstances. And further loyalty point programs also differ – third party managed and in-house – and may invite different interpretations and inevitably varied answers.