In a significant ruling, the Gujarat Authority for Advance Ruling (AAR) has held that Input Tax Credit (ITC) is not admissible on expenses incurred for the buyback of shares. This decision was delivered in the case of M/s. Gujarat Narmada Valley Fertilizers & Chemicals Limited via Order No. GUJ/GAAR/R/2025/11 dated 25.03.2025.
Case Background
The applicant, a publicly listed company engaged in the manufacturing of fertilizers and chemicals, had initiated a share buyback program as part of a capital restructuring exercise under a resolution issued by the Government of Gujarat. The company sought clarity on whether ITC could be claimed on various expenses incurred in connection with the share buyback, such as:
- Legal and professional fees
- Advisory services
- Advertisement and promotional costs
- Regulatory charges and related expenditures
The applicant argued that these expenses were incurred in the course or furtherance of business, falling under the ambit of Section 16(1) of the CGST Act, 2017. Additionally, it contended that such activities were incidental to its business operations, as defined under Section 2(17) of the Act.
Key Arguments by the Applicant
- Business Purpose Justification: The buyback aimed to enhance financial strength, improve shareholder value, and reduce capital costs, which align with business interests.
- Citing Judicial Precedents: The applicant relied on the Bombay High Court’s judgment in Coca-Cola India (P.) Ltd. (2009) to argue that expenses incurred to enhance business outcomes should qualify for ITC.
- Nature of Buyback: It was emphasized that buybacks involve cancellation of shares and not a sale or purchase, thus not constituting a supply under GST.
AAR’s Observations and Decision
The Gujarat AAR rejected the applicant’s claim and ruled as follows:
- Securities Outside GST Scope: As per Sections 2(52) and 2(102) of the CGST Act, securities are neither goods nor services. Consequently, transactions in securities — including share buybacks — are not subject to GST.
- Exempt Supply Treatment: Citing Section 17(3) of the CGST Act and the provisions of Rules 42 and 43, the AAR classified buyback-related transactions as exempt supplies. As such, any common input services used for both taxable and exempt supplies necessitate proportional ITC reversal.
- Rejection of Parity with Fresh Share Issuance: The AAR rejected the applicant’s claim that buybacks should be treated similarly to issuance of shares, reiterating that both activities involve securities, which are excluded from the GST regime.
Conclusion
The Gujarat AAR conclusively held that Input Tax Credit is not available on expenses related to the buyback of shares. Businesses undertaking such buybacks must reverse ITC on input services used for both taxable supplies and buyback-related activities, as the latter falls under exempt transactions.
Key Takeaway for Businesses
This ruling reaffirms that transactions in securities, including share buybacks, are beyond the scope of GST, and hence, ITC on associated expenses cannot be claimed. Companies must carefully assess the impact on their input credit structure and ensure compliance with ITC reversal provisions under Rules 42 and 43 of the CGST Rules.