No ITC on Share Buyback Expenses Unless Linked to Taxable Supply: AAR [Read Order]

In the case of Gujarat Narmada Valley Fertilizers & Chemicals Limited (GNFC), the Gujarat Authority for Advance Ruling (AAR) held that the Input Tax Credit (ITC) on expenses incurred for buyback of shares is not admissible under GST laws, as such transactions involve securities which are neither goods nor services.

The case was brought before the AAR by GNFC, a listed public limited company engaged in the manufacturing of fertilizers and chemicals, which had initiated a share buyback programme in December 2023. The buyback was carried out in response to a Government of Gujarat resolution dated 24 April 2023, which directed all State Public Sector Undertakings (SPSUs) to undertake capital restructuring, including buybacks, to improve financial health and market capitalization.

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The central issue before the AAR was whether GNFC could claim ITC on various expenses incurred during the share buyback process, such as professional and legal fees. GNFC submitted that these expenses were in the course or furtherance of business, and hence, were eligible for ITC under Section 16(1) of the CGST Act, 2017.

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The company further submitted that share buyback contributes to business objectives by enhancing shareholder value, reducing capital, and improving return on equity. It also relied on legal precedents and international interpretations to support its claim.

The AAR examined the definitions of “goods”, “services”, and “securities” under the CGST Act and observed that shares are categorized as securities. As per Sections 2(52) and 2(102) of the CGST Act, both goods and services exclude securities, so transactions in securities fall outside the scope of supply.

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The AAR held that since the buyback of shares is a transaction in securities, the related expenses do not relate to a supply of goods or services, and so do not satisfy the primary condition for availing ITC under Section 16(1) of the CGST Act. The AAR clarified that even if such a transaction contributes to business strategy or value creation, it cannot qualify for ITC if it is not connected to a taxable supply.

The AAR ruled that GNFC is not eligible to claim ITC on the expenses incurred for the buyback of its shares and further directed that the company must reverse any common ITC claimed on inputs and input services related to the buyback process.

To Read the full text of the Order CLICK HERE

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