1.1 Loyalty program managing entities (‘Reward Manger’, for brevity) manage and operate reward points for its partner/s / organizations with whom the agreements are entered. In this business model of providing rewards, managing reward points and redemption of reward points, Reward Manager enters into agreement with various organizations for issuance and managing of reward points of the customers of the entities / organizations. Generally, the following activities are involved in this scheme of arrangement
a. On purchase of products of ‘partners’ (partners means Companies associated with Reward Manager for managing their loyalty / reward points) by the customers, the customers get rewards / payment points. The rewards points can be redeemed by customers, while making future purchases of products of ”partners”. Reward Manager maintains reward points earned by the customers on behalf of the partners.
b. Upon customers getting rewarded for the reward / loyalty points, the partner/s transfers amount equivalent to the reward points earned as per the agreement between the partner/s and the Reward Manager. Say for instance in pursuance to the reward points management, “partner” transfers amount equivalent to ₹ 0.35 per reward point, as issuance charges to the Reward Manager.
c. On redemption of points by the customer on any purchase, Reward Manager transfers the amount equivalent of reward point used by the customer and the outlet gives reduction to the customer to the extent of points redeemed.
d. The reward points earned by customers generally have a validity period say 24 months. In case the reward points are not redeemed by the customers within the validity period, the customers cannot redeem the reward points after the validity period. Where reward points expire, the Reward Manager is entitled to retain the amount initially transferred by the partner to the extent of points expired.
1.2 Generally, Reward Manager have the following streams of revenue
a. Fee / service charges from partners for managing the reward points.
b. Amount earned on account of expiry of reward points.
1.3 Under the erstwhile service tax provisions, the taxability on amount earned by the Reward Manager upon expiry of reward points has been in dispute. In this article an attempt is made to analyse the implication of tax on loyalty points / reward points under the Central Goods and Services Tax Act, 2017 (for brevity, “CGST Act”).
2. Central Goods and Services Tax Act, 2017
A. Legislative background
2.1 Section 2(52) of the CGST Act defines goods to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
2.2 Section 7(2) of the CGST Act provides that activities or transactions specified in Schedule III shall be treated neither as supply of goods nor a supply of services. Amongst other transactions / activities listed in Schedule III of the CGST Act, ‘Actionable claims, other than lottery, betting and gambling’ is listed as neither supply of goods nor a supply of services.
2.3 Section 2(1) of the CGST Act provides that actionable claim shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882).
2.4 Actionable claim is defined in Section 3 of the Transfer of Property Act, 1882 as under
“actionable claim means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”
2.5 In the case of Sunrise Associates (2006) 145 STC 576 (SC) the Honorable Supreme Court gave reference to the case of Sarada Mills (1972) 2 SCC 877, 880 to state what constitutes an actionable claim. In case of Sarda Mills, the Honorable Supreme Court explained an actionable claim as follows
“Section 130 of the Transfer of Property Act however speaks of transfer of actionable claim. Actionable claims under the Indian law include claims recognised by the Court either as to, unsecured debts or as to beneficial interests in moveable property not in possession. A debt is an obligation to pay a liquidated or certain sum of money. A beneficial interest in moveable property will include a right to recover insurance money or a partner’s right to sue for an account of a dissolved partnership or a decretal debt or a right to recover the insurance money or the right to claim the benefit of a contract not coupled with any liability (emphasis supplied)”.
In the Sunrise Associates case, the Honorable Supreme Court held that sale of lottery ticket also amounts to the transfer of an actionable claim. It is mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance. It is nothing more than a token or evidence of this right. Right to participate in a lottery is an actionable claim and that sale of lottery tickets is not goods and not liable to sales tax.
2.6 In a recent judgement of Skill Lotto Solutions Pvt. Ltd. Writ Petition (Civil) No. 961 of 2018 December 03, 2020 the Honorable Supreme Court held the following
“The Constitution Bench judgment of this Court in Sunrise Associates has laid down that lottery is an actionable claim as proposition of law. The observation cannot be said to be obiter dicta.
The inclusion of actionable claim in definition “goods” as given in Section 2(52) of Central Goods and Services Tax Act, 2017 is not contrary to the legal meaning of goods and is neither illegal nor unconstitutional”
B. Tax implications
2.7 Service charges for managing reward points: Reward Manager generally charges a fee separately for managing the reward points of the partner/s and the said fee is liable to tax as a service under GST law.
2.8 Reward points:
2.8.1 Reward points also confer the member the right to claim the benefit of reward points without any liability. Therefore, based on the judgment of Sunrise Associates, paper writer’s view is that loyalty points can also be considered as actionable claims. Thus, issuance of reward points to the customers by the partners would not tantamount to supply since actionable claim (other than lottery, betting and gambling) is neither supply of goods nor a supply of services in terms of Schedule III of the CGST Act, 2017. In the case of Loyalty Solutions and Research Private Limited Advance Ruling No. HAR/HAAR/R/2017/18/4 dated 11.04.2018, the Honorable AAR Haryana has mentioned that reward points earned by the end customers for purchase of products of “partners” to loyalty programme are indeed “actionable claim”.
2.8.2 The tax implication on expiry of reward points has been a contentious issue under the erstwhile service tax provisions and continues even under the GST law. Reward points earned by the customers on purchase of products of partners which expire after the validity period can no longer be used by the customers and the customer loses right over the reward points upon its expiry. The paper writer’s view is that reward points even after expiry of reward points it does not lose its characteristic as actionable claim since reward points are ‘conditional’ which would fall within Section 3 of the Transfer of Property Act, 1882 and as such would not be liable to tax under GST law as the same would be covered in Schedule III of the CGST Act, 2017. However, just because reward points upon expiry results in revenue in the hands of the Reward Manager, it does not partake the colour of supply in the paper writer’s view.
To take the discussions further, say if a gift voucher (where supply of goods or services is not identifiable at time of issuance of voucher) lapses and on account of lapsing of such gift voucher, the amount attributable to the expired voucher results in revenue, can it be said that the expired voucher is a supply under GST law. The paper writer’s view is that expiry of gift voucher (where supply of goods or services is not identifiable at time of issuance of voucher) resulting into revenue for the issuer of voucher does not tantamount to supply. Similarly, expiry of reward points in the paper writer’s view also does not tantamount to supply under GST law.
2.8.3 In the case of Loyalty Solutions and Research Private Limited Advance Ruling No. HAR/HAAR/R/2017/18/4 dated 11.04.2018, the Honorable AAR Haryana has held as under in respect of forfeiture of points
‘The value of points forfeited of the applicant on which money has been paid by the issuer of points on account of failure of the end customers to redeem the payback points within their validity period is to be treated as “supply” of services and consequently be chargeable to GST under the CGST, HGST or IGST Act as the case may be’
The said Ruling has been upheld Honorable AAAR Haryana.
2.8.4 The issue of taxation of forfeiture of reward points is contentious and we will have to keep a watch how the GST law will evolve on this matter.
2.9 Redemption of points by the customer:
The customers can redeem the reward points earned for purchase of products / or receive services. Upon redemption of points, the vendor sells the goods / provides the service as the case maybe. To discuss the tax implication in the hands of the vendor on redemption of points an illustration is provided below
A customer purchasing a product from a vendor costs ₹ 1,000/- excluding GST for our discussion. The customer has reward points accumulated worth ₹ 250/-; the customer can pay by redeeming points worth ₹ 250/- and pay balance amount of ₹ 750/- by cash to purchase the product of ₹1,000/. The question arises whether the vendor selling the product should levy GST on ₹ 1,000/- or ₹ 750/-. The vendor in the illustration is required to pay GST on ₹ 1,000/-. The consideration of ₹ 250/- for the points redeemed by the customer would be paid to the vendor by the Reward Manager. Though the consideration of ₹ 250/- is not paid by the customer, GST would be payable on ₹ 1,000/-, since in terms of Section 2 (31) (a) of the CGST Act, 2017 the consideration for supply of goods or services or both includes payment made by the recipient or by any other person.
An attempt has been made in this article to make a reader understand the issue involved in the loyalty program under the GST law. This article is written with a view to incite the thoughts of a reader who could have different views of interpretation. Disparity in views, would only result in better understanding of the underlying principles of law and lead to a healthy debate or discussion. The views written in this article is as on 11.12.2020