28 December 2017

Treatment of vouchers under GST law

by Devanu Roy Choudhury


With the increasing trend of electronic commerce, adoption of prepaid vouchers and gift cards has reached new heights. Vouchers are instruments which are redeemable on its face value against supply of goods or services. For example, multi-brand retailers supply gift cards and certificates to customers which can be redeemed against purchase of merchandise of value equal to the face value as printed on such gift card or certificate. Taxability of vouchers under the erstwhile Sales Tax (or Value Added Tax) and Service Tax law was a tricky and contentious issue, with disputes often travelling to the Apex Court for final adjudication. The Legislature has sought to tax vouchers under the Goods and Services Tax (“GST”) regime, by including specific provisions in the law. However, there are still unresolved problems which may lead to controversy in the near future.


Regulation by the Reserve Bank of India

Before we delve into the taxability of vouchers under the GST law, it is pertinent to understand the manner in which such payment instruments are regulated in India. A payment system, which enables payment to be effected between a payer and a beneficiary, is governed in India under the Payment and Settlement Systems Act, 2007 (“PSS Act”).[See End note.1] Pre-paid vouchers are regulated by the Reserve Bank of India (“RBI”) in India as Prepaid Payment Instruments (“PPI”) under the PSS Act and such instruments cannot be set up and operated by an entity without the prior approval of RBI[See End note.2]. RBI identifies three types of PPIs – Closed System PPIs, Semi-closed System PPIs and Open System PPIs[See End note.3], out of which the first two are relevant for the present discussion. ‘Closed System PPIs’ are issued by an entity for facilitating the purchase of goods or services from that entity only and are not classified as a payment system requiring approval by the RBI. On the other hand, ‘Semi-closed System PPIs’ are used for the purchase of goods or services at a group of clearly identified merchant locations / establishments, which have a specific contract with the issuer to accept PPIs as payment instruments and require prior authorisation from RBI. PPIs in the form of gift instruments may also be issued, but such instruments are non-reloadable.


EU-VAT’s Voucher Directive

In June 2016, member States of the European Union (“EU”) adopted Council Directive 2016/1065 [See End note.4] (“Voucher Directive”), which inserts rules relating to treatment and taxability of vouchers into Council Directive 2006/112/EC [See End note.5] (“EU-VAT”[See End note.6]). Member States have to necessarily amend their national legislations till 31st December 2018 to give effect to the Voucher Directive. The Voucher Directive defines ‘voucher’ as an instrument where there is an obligation to accept it as consideration or part consideration for supply of goods or services and where such goods or services 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 [See End note.7] The Voucher Directive further recognises two types of vouchers – ‘single-purpose voucher’ (“SPV”), where the place of supply of goods or services to which the voucher relates and the applicable VAT are known at the time of issue of voucher, and ‘multi-purpose voucher’ (“MPV”), which are defined as vouchers other than a single-purpose voucher [See End note.8].  Each transfer of SPV by a merchant is regarded as a supply of goods or services to which the voucher relates and the actual handing over of goods or provision of services becomes irrelevant [See End note.9]. The underlying principle is to treat the supply of SPV as the supply of goods or services represented by such SPV itself, even though a registered person may be merely supplying a piece of paper or its electronic equivalent. On the other hand, in case of MPV, supply takes place with the actual handing over of goods or provision of services [See End note.10].


Indian GST law on vouchers

The GST legislation in India has borrowed the definition of ‘voucher’ from Voucher Directive [See End note.11]. Though India’s GST law does not identify SPV and MPV by name, the same underlying principle has been borrowed from the Voucher Directive to its provisions relating to time of supply [See End note.12]. It provides that in case the supply is identifiable at the time of issuance of voucher, the time of supply shall be the date of issue of such voucher and where such supply is not identifiable at the time of issuance of voucher, the time of supply shall be the date of redemption of such voucher. The provisions however do not provide clear criteria about the identification of supply at the time of issuance. Placing reliance on the EU’s Voucher Directive, it can be said that the supply may be said to be identifiable at the time of issuance of voucher if place of supply of goods or services to which the voucher relates and the applicable GST are known at the time of issue of voucher. The time of supply in such cases shall be the issuance of the voucher.

In case of SPV, GST is due irrespective of whether such voucher is actually redeemed or not. For example, a voucher which entitles the user to download only e-books from the merchant’s website will be an SPV, whereas a voucher which entitles the user to buy physical books and download e-books may be an MPV, as books and e-books are subject to different rates of GST. Another example of SPV is a voucher issued by a restaurant which can be redeemed against dining in the restaurant and availing the take away service of the restaurant, as both are taxable at the same GST rate. However, if such voucher is also redeemable against availment of outdoor catering service of the restaurant, such voucher may qualify as an MPV. In view of the above distinction between SPV and MPV, disputes regarding the nature of a voucher are bound to crop up in the future. Businesses issuing SPVs may need to re-visit their practices so as to appropriately structure their voucher schemes as MPVs which may entail certain advantages.

The dispute as to whether vouchers qualify as ‘goods’ or ‘services’ was settled by the Supreme Court in Sodexo case[See End note.13], which held that pre-printed meal vouchers were not ‘goods’ but the supply of such vouchers constituted a ‘service’. Moreover, this distinction between goods and services is no longer relevant after the enactment of GST in India. However, another issue that arises is whether such prepaid vouchers or gift cards qualify as ‘money’ since these instruments require prior approval from RBI before their issuance. As per GST law, ‘money’ includes an instrument recognised by the RBI when used as a consideration to settle an obligation or exchange with Indian legal tender of any denomination [See End note.14]. As evident from the definition, had such vouchers or gift cards been capable of being converted into equivalent money, then such instruments could have qualified as ‘money’. But, vouchers or gift cards (closed and semi-closed pre-payment instruments) can be redeemed only against goods or services. Moreover, ‘money’ as a legal tender has acceptability across the length and breadth of the country, whereas a voucher can be redeemed only at the premises of the issuer or the participating merchants. The Court in Sodexho Pass Services case [See End note.15] has held that vouchers are not substitutes for carrying cash as is the case with debit card/credit card.



Use of alternative modes powered by technology for making payment towards procurement of goods and services is becoming sine qua non in the present era. As new forms of vouchers emerge, coupled with the treatment of the same under the new law of GST, issues are bound to be more pronounced. Importance of a pro-active strategy to re-examine the present system and devising legally sound yet compliant mechanism needs no greater emphasis. As every business house is employing voucher system in some way or another today, attendant issues like valuation and input tax credit may also require attention.

[The author is an Associate, Lakshmikumaran & Sridharan, New Delhi]


  1. Refer Section 2(1)(i) of the Payment and Settlement Systems Act, 2007.
  2. Refer RBI Circular No. RBI/DPSS/2017-18/58, dated 11th October, 2017 for master directions relating to issuance and operation of prepaid payment instruments.
  3. Ibid.
  4. Council Directive (EU) 2016/1065, dated 27th June, 2016.
  5. Council Directive (EU) 2006/112/EC, dated 28th November, 2006.
  6. Council Directive 2006/112/EC (EU-VAT) contains the scheme of European Union’s common system of VAT.
  7. Refer Article 30a of the Council Directive (EU) 2016/1065.
  8. Supra note vi.
  9. Refer Article 30b of the Council Directive (EU) 2016/1065.
  10. Ibid.
  11. Refer Section 2(118) of the CGST Act.
  12. Section 12(4) in case of supply of goods against a voucher and Section 13(4) in case of supply of services against a voucher.
  13. Sodexo SVC India Pvt. Ltd. v. State of Maharashtra, (2015) 16 SCC 479.
  14. Section 2(75) of the CGST Act.
  15. Sodexho Pass Services India Pvt. Ltd. v. Commissioner of Service Tax, 2014 (33) STR 561 (Tri.-Mum.).



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