ITC on Share Buyback Expenses Disallowed: A Doctrinal Analysis of AAR Gujarat Ruling in the Case of GNFC Ltd. (Order No. GUJ/GAAR/R/2025/11 dated 25.03.2025)
I. Introduction
In a recent pronouncement, the Gujarat Authority for Advance Ruling (AAR) has reaffirmed the principle that Input Tax Credit (ITC) is inapplicable on expenses incurred in relation to transactions in securities, including buyback of shares. The ruling was rendered in the case of M/s Gujarat Narmada Valley Fertilizers & Chemicals Limited (GNFC) under Application No. Advance Ruling/SGST&CGST/2024/AR/22, Order No. GUJ/GAAR/R/2025/11 dated 25.03.2025.
This ruling is significant for corporates engaged in financial restructuring, as it settles the interpretational controversy surrounding the eligibility of ITC on professional, legal, and incidental expenses related to share buybacks.
II. Factual Matrix
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The applicant, GNFC, a public limited company listed on stock exchanges, is engaged in the manufacture of fertilizers and chemicals.
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Pursuant to a Government of Gujarat resolution, the company undertook a buyback of its equity shares as part of a capital restructuring strategy.
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In doing so, it incurred expenses on advisory, legal, advertisement, regulatory compliances, and other professional services, and claimed ITC on these under Section 16(1) of the CGST Act, 2017.
III. Contentions of the Applicant
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Business Nexus: The applicant submitted that the buyback was carried out in the course or furtherance of business, aimed at enhancing shareholder value, improving market perception, and optimizing capital structure — thereby satisfying the conditions under Section 16(1).
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Inclusion under 'Business': Reference was made to Section 2(17), which includes incidental or ancillary activities to the main business. The applicant contended that financial restructuring is ancillary to its core manufacturing activity.
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Definition of Input Services: The services availed for the buyback, such as consultancy, legal advice, and advertising, fall squarely within the ambit of ‘input services’ under Section 2(60).
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Precedential Support: The applicant cited the ruling in Coca-Cola India Pvt. Ltd. [2009] 22 STT 130 (Bom.), wherein the Hon’ble Bombay High Court allowed ITC on expenses aimed at business enhancement.
IV. Legal Issue
Whether expenses incurred in relation to the buyback of shares qualify for Input Tax Credit (ITC) under the provisions of the CGST Act, 2017?
V. AAR’s Findings and Legal Interpretation
The Authority for Advance Ruling rejected the applicant’s claims, making the following critical doctrinal interpretations:
1. Securities Are Neither Goods Nor Services
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Under Section 2(52) of the CGST Act, “goods” means every kind of movable property other than money and securities.
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Similarly, Section 2(102) defines “services” to mean anything other than goods, money, and securities.
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Therefore, securities—including equity shares—do not fall within the GST net.
🧾 Interpretation:
By express legislative exclusion, transactions in securities fall outside the taxable domain of GST. Accordingly, the principal transaction (share buyback) is not a taxable supply under GST.
2. Share Buyback is an Exempt Supply under Section 17(3)
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Section 17(3) provides that “the value of exempt supply shall include… transactions in securities.”
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Hence, the buyback transaction, though not a supply per se, is deemed to be an exempt supply for the purpose of ITC apportionment.
📜 Interpretation:
This deeming fiction under Section 17(3) triggers the operation of Rule 42 and Rule 43 of the CGST Rules, mandating proportionate reversal of common input tax credit used for both taxable and exempt supplies.
3. Input Services Used for Exempt Transactions – ITC Denied
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The expenses (legal, professional, advertisement) are directly linked to the buyback activity, which is non-GST and exempt by fiction.
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Therefore, the entire ITC attributable to such expenses is inadmissible.
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For common services, pro-rata reversal is mandatory as per Rule 42 (inputs/input services) and Rule 43 (capital goods).
4. Rejection of Equivalence with Share Issuance
The applicant’s comparison of buyback with the issuance of shares—both being part of financial structuring—was not accepted. The AAR emphasized:
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Regardless of whether issuance or buyback is undertaken in the course of business, the nature of the transaction remains a security transaction, which is excluded under Section 2(52)/(102).
🧾 Doctrinal Clarification:
Business intent does not override statutory exclusions. The legislative design is clear: no ITC shall be allowed where the underlying transaction is in securities.
VI. Comparative Jurisprudence and Statutory Hierarchy
The reliance on Coca-Cola India Pvt. Ltd. was held inapposite, as that case was under the pre-GST regime (Service Tax), which did not exclude securities from its ambit in the same manner as the CGST Act does.
Moreover, under the GST regime, the availability of ITC is governed strictly by statute, and the courts have consistently held (e.g., Mohit Minerals, D.Y. Beathel Enterprises) that ITC is not a matter of right, but subject to fulfillment of conditions under Section 16 to 21.
VII. Practical Implications and Compliance Advisory
Aspect | Legal Position as per AAR |
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Nature of Share Buyback | Transaction in securities – outside GST scope |
GST Applicability on Buyback | Not applicable |
ITC on Buyback-Related Expenses | Not admissible |
Common Input Services | Proportional reversal mandatory under Rule 42/43 |
Business Purpose Justification | Not sufficient to override statutory exclusion |
Risk of Non-Reversal | Exposure to demand, interest, and penalty under Section 73/74 |
VIII. Concluding Remarks
The AAR Gujarat ruling provides authoritative clarity on the ineligibility of ITC with respect to expenses incurred on share buybacks. It delineates the boundaries of what constitutes a taxable supply, and emphasizes that business motive or benefit is irrelevant if the underlying transaction is statutorily excluded from GST.
For professionals and corporations, the message is unequivocal:
Where the underlying activity involves securities, ITC on associated expenditures is not available—even if the activity is undertaken in the course or furtherance of business.
This calls for robust internal controls, pre-transaction tax impact assessments, and careful classification of input services, especially in financial restructuring, capital markets, or investment-related activities.