E commerce retailer, Myntra, is not eligible for input tax credit on vouchers sourced from third party and given to customers, Karnataka’s Authority for Advance Ruling (KAAR) has said.
The retailer moved to AAR with an application saying that it proposes to run a loyalty program. The customers will earn loyalty points based on their purchases. The portal will allow, subject to some terms and conditions, to redeem these points in exchange of vouchers and subscriber packages. The retailer sourced these vouchers and subscription packages from a third party and make a payment along with GST. The question was will input tax credit be available?
Section 17 of CGST Act
Section 16 of CGST Act deals with eligibility and conditions for taking input tax credit while section 17 prescribes norms for apportionment of credit and blocked credits. Sub section 5(h) of section 17 makes it clear that ITC will not be available in case of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free.” The application was settled on the basis of the said sub provision.
KAAR noted that the participation in loyalty program is based on meeting the pre-defined eligibility criteria and subject to acceptance of the terms and conditions by the customer while loyalty points are non-transferable (cannot be converted into cash). It explicated that, redemption of loyalty points by customer for receiving the vouchers implies that the vouchers are issued free of cost (FOC) and amounts to disposal of vouchers (goods) by way of gift which is “squarely covered under section 17 (5)(h) of the CGST Act.
Citing the decision of Supreme Court in TCS and Vikas Sales Corp, KAAR envisaged that e-vouchers being a movable property, capable of being transmitted electronically and supplied physically, qualify as goods and disposed the application.
Saurabh Agarwal, Tax Partner with EY feels that the ruling would help in clarifying the GST Department stand that no ITC would be available to the industry where the gifts/vouchers, etc are issued by the Companies on a free of cost basis as part of their marketing & promotion spent or in terms of their loyalty programs. “Important to note that ruling is legally binding only on the Applicant but will have a persuasive value in case of similar litigations,” he reminded.
Sandeep Sehgal, Partner-Tax with AKM Global says the ruling of the Karnataka AAR has categorised e-vouchers as ‘goods’, which are being distributed without any consideration and hence not eligible for ITC. However, “there could have been an alternative view possible which has not be examined that the e-vouchers could be viewed as a mechanism to provide discounts to the customers for encouraging increased sales, and the procurement of e-vouchers, in turn by Myntra can be viewed as a sales promotion technique and hence ITC could have been allowed on the same,” he said.