Amount retained upon expiration of loyalty points is “Supply of Services” in GST : AAR

Introduction

Actionable claims have been included in the definition of ‘goods’ in CGST Act, 2017. However actionable claims other than lottery, betting and gambling are treated neither as supply of goods nor as supply of service under Schedule III of the CGST Act. Accordingly, only actionable claims in the nature of lottery tickets, betting and gambling will be taxed as supply of goods under GST.

Rewards points earned by the end customers for the purchase of products of “partners” to loyalty programme are also ‘actionable claim’ and thus no GST on loyalty points is applicable upon accruing or providing of loyalty / reward points.

However question arises as to what would be the treatment where such loyalty points are expired. Whether it would still be an actionable claim? Further whether GST would be applicable in case such expired loyalty points are issued by a separate agency which has already collected amount towards such points from its partners.

On above issue the AAAR Ruling in the case of Loyalty Solutions and Research Pvt Ltd is relevant and same is discussed in succeeding para’s.

Whether amount retained upon expiration of loyalty points under a loyalty programme are to be treated as ‘supply of services’ liable to GST or the same will remain as actionable claims which are not taxable under GST?

Let us refer to the case of Loyalty Solutions and Research Pvt Ltd (AAAR Ruling 2019), where ruling was sought on the issue.

Facts of the Case:

• The appellant owns and operates a reward point based loyalty programme that is integrated towards it partners and their customers.
• The applicant is managing the customer loyalty programme for its clients/partners, which is based on issuance of reward points also known as payback points by the applicant to end customers.
• These reward payment points have value of 0.25 INR each.
• For managing this loyalty programme, appellant is getting Management and service fee.
• Appellant is paying GST on the management fee as well service charges charged by them.

Pattern of loyalty programme by appellant is as follows:

• On purchase of products of “partners” under this loyalty programme, end-customers get reward/payment points
• These rewards points can be redeemed by customers, while making future purchases of products of “partners”.
• The “partner” transfers amount equivalent to 0.25 of INR, per reward point, as issuance charges to appellant.
• Whenever any purchase is made by end customer, by using/redeeming rewards points, appellant transfers amount equivalent to 0.25 INR per reward point used to the concerned store
• The concerned store gives discounts on the payment to be received from end-customer to this extent.
• The rewards points have a validity period of 36 months, meaning thereby that the customer cannot redeem these reward points, after expiry of 36 months from the date of issuance
• It may happen that the customer does not or is not able to redeem the rewards points, within their validity period of 36 months from the date of issue.

Ruling by Haryana AAR:

• The appellant had sought advance ruling on the point that whether the value of points forfeited on which money had been paid by the issuer but there is a failure of the end customers to redeem the payback points within their validity period would amount to consideration for ‘actionable claim’ be subject to GST?
• The Haryana AAR held that, amount retained by appellant due to expiry of Payback points constitutes a consideration for supply of services by appellant to its clients. It was held that the lapsed points no longer remain ‘actionable claim’. However, unexpired payback points might have fallen within the meaning of ‘actionable claim’.
• It was held that the value of points forfeited and retained amounts to the consideration received in lieu of services provided by the appellant and thus would be outside the scope of being considered as actionable claim and hence to be treated as supply of services for the purpose of levy of GST.

Appeal to Haryana AAAR:

Against the order of Haryana AAR, the question agitated by the appellant before Haryana AAAR are as follows:

1. Whether the nature of payback points, which are considered as actionable claim during their validity period in the order of AAR, changes post expiration of their validity period? And the amount retained by the applicant on account of such expiration is therefore liable to be added to the value of taxable supplies made by the applicant?
2. How can Payback points which are considered as “goods” during their validity period become a supply of “service” post-expiration?

Findings / Ruling of Haryana AAAR:

• It is very clear that the loyalty programme is a programme devised with the aim of generating and maintaining customer loyalty towards the partners entering into agreement with the appellants for the running and managing the overall scheme.
• It is an admitted position that the amount received upfront from the Partners w.r.t the generated payback points is booked as revenue in the appellant’s account.
• The consideration for total payback points including those becoming unredeemed ones after validity period, has flowed from the partners.
• AAAR observed that this consideration has 2 components – fixed and variable. The fixed component is what has been received by the appellants by the name ‘management fee’ & the variable component is the amount booked as revenue w.r.t the unredeemed leftover payback points.
• Appellant’s contention that AAR has admitted that payback points are in the nature of actionable claim and therefore any consideration is out of the provision of GST is grossly misplaced.
• In fact Appellant is in possession of points and revenue at their end. Whenever customers claim/redeem the points it is their liability to honour the claim of customers. However when there can be no claims by the end customers after the expiry of validity period, these are no more actionable claims. These stand lapsed at the end of the customers & the appellant treats the redeemed money as revenue, which can never be treated as claim against anyone.
• The consideration for the unredeemed payback points has already flowed from the Partners.
• After validity period, the same has become the appellant’s revenue by virtue of the contract of servicing of the loyalty scheme including the points executed between the Partners & the Appellants.
• Even if it is admitted that there is a provisioning of service by the appellant to the end customers, there cannot be any service or actionable claim against the payback points not redeemed by them against anyone.

On the basis of above, the AAAR thus upheld the ruling passed by Haryana AAR. The amount retained by the applicant on account of expiration of the loyalty points is liable to be added to the value of taxable supplies made by the applicant as there is a supply of service and thus same will be subject to GST.

The order of AAAR can be downloaded from below:

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TW Editorial Team comprises of team of experienced Chartered Accountants and Advocates devoted to spread the knowledge of GST amongst the various stakeholders.