TaxTMI 
TaxTMI 
TaxTMI 
Input Tax Credit (ITC) denial on Share Buybacks under GST: Furtherance of Business vs. Statutory Exclusions, deeming fiction
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....ing therefore has substantial implications for capital market transactions, corporate restructuring, and the scope of ITC for listed entities and large corporates. Key Legal Issues 1. Eligibility of ITC on buyback-related expenditure The primary legal issue is whether GST paid on input services and goods used for implementing a share buyback-such as professional fees, legal and consultancy charges, and incidental expenses-is eligible as ITC u/s 16(1) of the CGST Act when the buyback is asserted to be "in the course or furtherance of business". This issue is essentially one of interpretation of substantive ITC provisions: whether the "furtherance of business" limb in section 16(1) can, by itself, justify ITC irrespective of the nature of the underlying transaction (here, a transaction in securities, which is neither "goods" nor "services") and in the face of subsequent statutory restrictions in section 17. 2. Treatment of buyback as "transaction in securities" and impact on ITC apportionment The second issue is whether a buyback of shares, though not amounting to a conventional outward supply, nonetheless qualifies as a "transaction in securities" and consequently falls within....
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....ections is a business activity that supports continuity, stability, and financial optimisation. * Input services like professional, legal, consultancy and other incidental costs incurred for buyback are used "in the course or furtherance of business" and therefore satisfy section 16(1). * The process does not itself generate outward taxable supplies but enhances financial health and future capacity to make taxable supplies. * Buyback is not a sale or purchase of shares in the conventional sense but a mechanism of capital reduction; hence it should not be treated as a "transaction in securities" attracting section 17(3). * By analogy, if ITC is accepted as admissible in relation to issuance of fresh shares (relying on ICAI FAQs and foreign jurisprudence such as Kretztechnik of the ECJ), parity of reasoning should extend similar treatment to buybacks. * The advance ruling authority (GAAR) improperly "read into" section 16(1) an additional requirement that the purpose for which input services are used must itself constitute a taxable supply under GST. (c) Appellate authority's reasoning The appellate authority firmly rejected the proposition that every cost incurred "i....
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....ties is excluded from the charging provisions relating to supply. * However, section 17(3) adopts a deliberate legislative fiction: "the value of exempt supply ... shall include ... transactions in securities". This aligns with the explanation to Chapter V of the CGST Rules, which provides that, for ITC purposes, "the value of security shall be taken as one per cent of the sale value of such security". A "conjoint reading" of these provisions led the authority to hold that, even though a transaction in securities is not a supply, Parliament has chosen to treat it as an exempt supply for the limited purpose of apportionment and denial of ITC u/s 17(2). The authority thus implicitly accepted that buyback of shares necessarily involves a "transaction in securities" as that expression is used in section 17(3), irrespective of its characterisation as capital reduction under company law. The corporate-law form (capital reduction vs. purchase/sale) does not displace the statutory fiction created for GST-ITC computations. 3. Requirement to reverse common ITC (a) Statutory mechanism u/s 17(2), where inputs or input services are used partly for taxable supplies and partly for exempt s....
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....tions in securities were expressly excluded from the taxable base and simultaneously brought within a specific ITC restriction mechanism. Accordingly, they were held not to assist the appellant's case. (b) CENVAT credit precedent: Kernex Microsystems (India) Ltd. The appellant also relied on Kernex Microsystems (India) Ltd. [2015 (12) TMI 1106 - CESTAT BANGALORE], where CENVAT credit was allowed on IPO-related advertisement and campaign services intended to raise funds for expansion of manufacturing facilities. The Tribunal's reasoning in that case rested on the broad wording of "input service" in Rule 2(l) of the CENVAT Credit Rules, which expressly covered "activities relating to business", "advertisement", "sales promotion", "financing" and "setting up of a factory". The appellate authority distinguished this line of authority on multiple grounds: * The CENVAT regime had a materially different and often broader definition of "input service", explicitly including activities "in relation to setting up of a factory" and "financing". * There was no analogous statutory exclusion of securities from the taxable base and no provision corresponding to section 17(3) sp....
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....ion that the appellant is not entitled to ITC on expenditure incurred for buyback of its shares. * Upheld the direction to reverse ITC on common inputs and input services attributable to the buyback, relying on section 17(3) and the explanation to Chapter V of the CGST Rules. * Rejected all arguments based on business-necessity, capital-raising jurisprudence, CENVAT credit precedents, and professional guidance (e.g., ICAI FAQ) as inconsistent with the statutory text and scheme of the GST law. Conclusion This decision firmly aligns ITC entitlement with the structural design of the GST statute regarding securities. By holding that expenses related to share buybacks do not qualify for ITC and that common ITC must be reversed to the extent attributable to such transactions, the authority has reinforced the legislature's clear intent to keep capital-market transactions outside the umbrella of input tax credit, notwithstanding their undoubted business significance. Practically, listed entities and large corporates must recognise that: * Costs associated with buybacks, capital reduction, and other security-market transactions will effectively carry GST as a non-creditable cos....