Eligibility for GST Input Tax Credit (ITC) related to expenses on IPO/Bonus/Right Issues:

An eminent concern within the GST framework pertains to the entitlement of Input Tax Credit (ITC) concerning expenditures associated with Initial Public Offerings (IPOs), Bonus Issues, or Right Issues by either Listed Companies or those endeavoring to secure listing.

Background

·            Under GST Laws, transactions in securities are not chargeable to tax. However, for the purpose of reversal of common ITC, the transactions in securities are treated as ‘exempt supply’ in terms of Section 17(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’)

 

·            Thus, a question arises as to whether ITC on expenses relating to IPO, Bonus Issue, Right Issues etc. are fully available to a listed/to-be listed entity.

 

Legal Provision - Interpretation

·            There are following two aspects to examine:

 

(i)                 Reversal of ‘Direct ITC’ i.e., Eligibility of ITC on inward supplies directly used for IPO, Bonus Issue, Right issue etc.; and

 

(ii)               Reversal of ‘Common ITC’

 

·            It is worthy to note the following three distinct arguments:

 

(a)          That Section 17(3) includes transaction in securities in exempt supplies only for the purpose of Section 17(2). In turn, Section 17(2) only talks about reversal of common ITC. Thus, Section 17(2) & (3) rules out treating transaction in securities as exempt supplies for reversal of ‘Direct ITC’.

 

(b)         That in terms of Explanation to Rule 42 & 43, the value of exempt supply relating to transaction in securities is directly link with sale only i.e., 1 percent of sale. Thus, no transaction other than sale of security is covered by Section 17(2) & (3). Since fresh issuance of shares is not a transaction of sale of shares, it is not covered by the rigours of Section 17(2) & (3).

 

(c)          That, in fact, there is no provision under GST law, which requires reversal of direct ITC i.e., ITC on inward supplies directly used in providing exempt supplies. Under Cenvat Credit Rules in erstwhile regime, Rule 6(1) was there for reversal of direct ITC on exempt services/products. Under GST, taxpayers are reversing direct ITC as a conservating approach.

 

·            Thus, it seems clear that except for sale of securities, no other transaction in securities is covered by Section 17(2) & (3).