Customer loyalty pays – to whom?
The next time you opt to receive a watch in exchange of loyalty points accumulated on your credit card, would you bother to think whether the watch is being supplied to you or to the credit card company with delivery alone being made to you?
Or, whether the pizza exchanged against the code printed on a beverage bottle has been supplied to you or to the beverage manufacturer with delivery alone being made to you?
The question might appear inconsequential but the value it holds, especially to companies in the consumer business sector, has been proven by the fact that the European Court of Justice (ECJ) was asked to answer it in the recent english case of Loyalty Management UK Ltd.
The tax authorities contended that the payment made by the company for the watch/pizza represents a third-party consideration. The company, on the other hand, contended that the watch/pizza has been supplied to the company though delivered to the consumer on its instructions.
The crux being the availability of input credit to the company making payment for such watch/pizza only if the supply is treated as being made, not to the consumer, but to that company. With a subtle difference between supply and delivery, the entire issue hinges upon identification of the recipient of the supply. gurdas maan jogiya
From the reward goods given against credit card points to the soap coupon found in the detergent box, from the free lounge service at airports given to the first-class passengers to the Tuesday-mania movie ticket against a cellphone subscription, the Indian scenario is not immune to this issue. Considering the impressive growth in the consumer business sector, the issue attains a special importance for the players therein.
It may be an appropriate time to have a relook at the Indian tax costs in the light of similarities and differences in the Indian provisions vis-a-vis international VAT/GST fundamentals.
Non-taxation of third party considerations in India
The first important point is that the European Court held the nature of payments made by the company as that of third party consideration.
Unlike the European Union where the third party consideration is expressly stated to be taxable, the Indian tax provisions are not clear. The VAT laws are not explicit on the taxability of the payments received from a third party vis-a-vis a sale transaction between a buyer and seller. Even under the service tax laws, it is not free from doubt whether third party consideration can be subjected to tax.
So does it mean that tax should not be charged in India when the watch company invoice the credit card company or the pizza company invoices the beverage manufacturer?
It would be worth examining the structure of the transactions in this new perspective of third party consideration to to correctly determine the tax costs.
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