Mutual Fund & Securities Investments: GST ITC Reversal – A Comprehensive Guide for Corporate Treasuries

By CA Surekha S Ahuja 

Corporate treasuries routinely invest surplus funds in mutual funds, bonds, or other securities. While these may appear routine, the Government’s intent under Section 17(3) of the CGST Act is clear:

Input Tax Credit (ITC) should only be claimed for taxable business operations, not for financial investments, to prevent cascading credit and protect the GST base.

The Gujarat AAAR ruling in Zydus Lifesciences Ltd. ([2025] 180 Taxmann 233) reinforced this principle, holding that ITC used for mutual fund subscriptions and redemptions must be reversed proportionately.

Key Ruling at a Glance

• Claim: Zydus claimed ITC on shared inputs/services partially used for mutual fund subscriptions/redemptions.

• Argument: Mutual fund units are securities, redemption is not a sale, and ITC reversal is inapplicable.

• AAAR Decision:

  • Mutual fund investments are exempt supplies under Section 17(3).

  • Redemption is commercially equivalent to a sale, making Rule 42 apportionment applicable.

  • Full ITC cannot be claimed; proportionate reversal is mandatory.

Implication: Financial investments, even if profitable or routine, cannot escape ITC reversal.

Legal & Policy Framework

Provision	Interpretation & Intent
Sec 17(2), CGST	ITC attributable to exempt supplies must be reversed.
Sec 17(3), CGST	“Transactions in securities” are deemed exempt; prevents ITC on financial investments.
Rule 42, CGST	Formula for reversal: ITC × (Exempt Turnover ÷ Total Turnover). Redemption proceeds = sale value.
Sec 16(1), CGST	ITC allowed only for inputs/services used in course/furtherance of business.

Government Intent:

• Ensure ITC aligns with taxable business activities.

• Prevent undue credit on exempt financial transactions.

• Provide clear methodology (Rule 42) to avoid disputes.

Precedents & Cascading Impact

• Share Buyback AAR (Gujarat Narmada Valley Fertilizers): ITC on buyback expenses must be reversed as securities transactions.

• Broader Implication: Treasury and investment operations are subject to ITC reversal, even when profitable.

• Corporate Takeaway: Review GST ITC policies for all investment-related inputs/services; assumption of “out-of-scope” is risky.

Practical Compliance Guidance

a. Segregation of Turnover: Track exempt turnover separately for subscriptions/redemptions.

b. Allocation of Inputs/Services: Map usage between taxable operations and investments.

c. Rule 42 Apportionment:

• Formula: ITC Reversal = Common ITC × (Exempt Turnover ÷ Total Turnover)

• Redemption proceeds used as “sale value” for exempt turnover.

d. Documentation: Maintain:

• Allocation methodology

• Turnover computation

• Justification for redemption = sale

• Rule 42 calculations

e. Timing & Reconciliation: Reverse ITC monthly/quarterly; reconcile in GSTR-9 annually.

f. Policy Framework: Establish treasury/GST policy for investment-related ITC usage.

Illustrative Example:

Parameter	Value
Total ITC on shared services	₹10,00,000
Exempt turnover (mutual fund redemptions)	₹4 crore
Total turnover	₹10 crore
ITC Reversal	₹4,00,000

Risks of Non-Compliance

• ITC disallowance with interest & penalties

• Flagged during GST audits

• Reduced available ITC, impacting cash flow

• Challenges in documenting allocation methodology

Do’s & Don’ts

Do’s:

• Track exempt turnover separately

• Map and allocate common inputs/services

• Apply Rule 42 precisely

• Maintain documentation rigorously

• Reconcile annual returns with provisional reversals

Don’ts:

• Do not claim full ITC on investment-related inputs

• Do not ignore Rule 42 apportionment

• Do not argue redemption ≠ sale

• Avoid delays in reversal

• Avoid undocumented ad hoc allocations

Key Takeaways

1. Mutual fund & securities investments are exempt supplies under Sec 17(3).

2. Redemption = sale for ITC apportionment purposes.

3. Rule 42’s formula provides valid, enforceable reversal mechanism.

4. Proper documentation, allocation, and timely reversal are mandatory.

5. Treasury/finance teams must actively implement internal policies to mitigate audit and regulatory risk.

Conclusion:

The Zydus Lifesciences AAAR decision is a benchmark ruling for corporate treasuries and finance teams. ITC on inputs/services used for financial investments cannot be claimed fully, and proportionate reversal under Rule 42 is required. Corporate treasuries must document, reconcile, and adopt internal policies to comply with the Government’s intent, avoid penalties, and safeguard against cascading ITC risks.

Section 56(2)(viib): A Complete Professional Guide for Startups, Investors & Tax Consultants

By CA Surekha S Ahuja

Valuation Defences, Judicial Principles, and Mistakes to Avoid

Section 56(2)(viib) continues to be one of the most heavily litigated provisions for early-stage companies, despite the existence of DPIIT exemptions and multiple CBDT clarifications. Assessments in recent years show a clear pattern: whenever the share premium appears high or documentation is weak, scrutiny teams invoke the provision aggressively.

The most recent case (details withheld for confidentiality) reinforces a long-standing judicial principle: valuation cannot be rejected merely because the startup later underperformed — it can be rejected only when it is unsupported, inconsistent, or lacking contemporaneous evidence.

This article brings together the legal structure, the current litigation trends, the ground-tested defences, and the most common mistakes that lead to additions.

Core Legal Structure of Section 56(2)(viib)

The provision taxes any excess of issue price over the Fair Market Value (FMV) of shares issued by a closely-held company to a resident investor.
Rule 11UA(2) allows two methods:

1. Net Asset Value (NAV) Method, or

2. Discounted Cash Flow (DCF) Method, certified by a Merchant Banker.

The assessee’s method choice is legally protected, unless the AO establishes perversity or lack of evidence.

The litigation begins when documentation behind the valuation is incomplete or internally inconsistent.

Why Notices Have Increased: The 4 Most Common Triggers Seen in Scrutiny

Recent assessments (including the present case) highlight four consistent triggers:

• High share premium without commercial justification

• DCF projections not supported with market studies or investor documents

• Mismatch between merchant banker valuation and board/investor agreements

• Non-availability of underlying valuation workings

In the present case, the addition survived solely because the assessee failed to produce working papers behind the DCF model.

Judicial Principles: What Courts Consistently Uphold

A synthesis of all major judgments yields three clear principles:

(a) Valuation is a forward-looking estimate

Courts reiterate that future cash flows cannot be tested by hindsight performance.

(b) AO cannot substitute the assessee’s valuation arbitrarily

The AO must show specific errors — not subjective disagreement.

(c) Startups are entitled to premium based on potential

DCF is built on potential, market opportunity, and scalability, not present turnover.

However, every favourable judgment relies on strong documentation.

What the Present Case Shows

The current matter delivers the most valuable takeaway for startups:

A valuation report is NOT a defence unless assumptions and workings are contemporaneously documented and verifiable.

The AO requested:

• Discount rate derivation

• Market sizing evidence

• Comparable company basis

• Revenue model and pricing justification

Because these were not furnished, the addition was upheld.

The Most Common Mistakes That Lead to Additions

Every failed 56(2)(viib) defence contains one or more of these lapses:

• Valuation report without detailed workings

• DCF assumptions based only on founder-made spreadsheets

• No market research or comparable evidence

• Inconsistency between investor term sheet and valuation report

• Share issue at different prices to different parties without justification

• Valuation prepared after the date of issue (not contemporaneous)

• Failure to produce emails, presentations, or internal notes supporting projections

These mistakes make the AO’s job easy.

DPIIT Recognition — Helpful But Not Automatic Protection

DPIIT-recognised startups receive relief only when all conditions under GSR 127(E) are satisfied.
Scrutiny teams still examine:

• Whether share premium matches business plan

• Whether funds were used for permitted activities

• Whether recognition was valid at the time of issue

• Whether 56(2)(viib) exemption conditions continue to be met

Thus, documentation discipline remains essential even for recognised startups.

The Defence Framework: How to Successfully Defend a Premium (A Practical Template)

This is the litigation-tested defence structure that consistently succeeds:

1. Method Validity (NAV/DCF)

Document why that method reflects the company’s stage and economics.

2. Assumption Evidence

Provide:

• Market sizing reports

• Competitor benchmarks

• Customer pipeline and pricing data

• CAC, LTV, conversion logic

• Growth assumptions tied to industry behaviour

3. Merchant Banker Report + Working Files

Include:

• Discounting logic

• Terminal value basis

• Comparable company selection

• Sensitivity analysis

4. Board & Investor Documentation

Maintain:

• Board minutes recording valuation rationale

• Term sheet

• SHA clauses referencing valuation

• Emails reflecting investor due diligence

5. Uniform Commercial Conduct

Avoid:

• Differing share prices in close intervals

• Back-dated valuations

• Sudden changes between projections unless explained

This holistic approach makes the defence credible and litigation-proof.

Mistakes to Avoid (High-Risk Red Flags Identified in Assessments)

• Preparing valuation post-facto

• Not preserving merchant banker working papers

• Using generic templates without industry benchmarks

• Ignoring inconsistencies between projections and actual conduct

• Treating DPIIT status as a blanket shield

• Issuing shares to related parties at lower prices

• Not furnishing calculation logic when AO queries arise

Avoiding these avoids 80% of additions.

Conclusion

Section 56(2)(viib) is not a threat if documentation is credible, contemporaneous, and commercially reasoned.
Valuation should be treated not as an Excel exercise, but as part of a complete valuation ecosystem — one that a company should build before issuing shares, not afterwards.

A method-based, evidence-backed valuation withstands scrutiny.
A report without working papers does not.

Import ITC and the 180-Day Rule: Why Deferred Supplier Payments Do Not Require GST Credit Reversal

Many businesses import goods on long credit terms. It is common in international trade to pay foreign suppliers after 90, 120 or even 180 days. Sometimes the payment gets delayed even more due to commercial reasons or because FEMA allows a longer credit period.

This often raises a genuine doubt during GST audit:

If payment to the foreign supplier is delayed beyond 180 days, do we need to reverse the Input Tax Credit of IGST paid at customs?

The clear and correct answer is: No. You do not need to reverse ITC on imports.

Below is an easy-to-understand explanation of why this is the law, what you should learn from it, and how to handle audits confidently.

Why the 180-day rule does not apply to imports

The GST law has a rule that if you do not pay your vendor within 180 days, you need to reverse the ITC and re-avail it after payment.
This rule is meant only for domestic purchases where:

• the supplier is a registered GST taxpayer,

• the supplier has issued a GST invoice, and

• GST is charged on that invoice.

But in imports, none of this happens.

A foreign supplier:

• is not a registered GST person in India,

• does not issue a GST invoice,

• does not charge GST.

Instead, you pay IGST directly at the customs port.
This is the tax that gives you ITC.

So the 180-day rule cannot apply.

Bill of Entry is your tax invoice for imports

For domestic purchases, the GST invoice is the document on which ITC is taken.
For imports, the equivalent document is the Bill of Entry.

If the Bill of Entry shows that IGST has been paid, ITC becomes fully eligible.

Whether you pay the foreign supplier after 30 days, 180 days, or 300 days does not affect your ITC.

FEMA rules and GST rules are separate

FEMA decides how long you can take to pay your foreign supplier.

GST decides when you can take ITC on imports.

These two laws do not overlap.
So even if FEMA allows you 9 months or more to pay the supplier, your GST credit is safe, because you already paid IGST at customs.

What the Gujarat AAR (Priya Holdings case) said

The Authority for Advance Rulings in Gujarat examined this exact issue and made things very clear:

• The 180-day rule applies only when the supplier is registered under GST.

• IGST on imports is already paid to the Government.

• Bill of Entry, not the foreign supplier invoice, is the document for ITC.

• Delayed payment under FEMA-permitted terms does not affect ITC.

• Asking for ITC reversal in such cases has no logic and defeats GST principles.

This reasoning is supported by the language and intention of the GST law.

What businesses should learn from this

This issue teaches three simple but important lessons.

A. ITC on imports is linked to IGST paid at customs, not to payment to suppliers

Once IGST is paid, ITC becomes available.

B. Delayed payment to foreign suppliers does not impact GST

If your payment terms stretch beyond 180 days, there is nothing to worry about from an ITC perspective.

C. Internal documentation is important

Keep your Bills of Entry, IGST payment proofs, shipping bills and bank payment documents organised.
These are enough to handle any audit query confidently.

How to handle this issue in audits or notices

If a GST officer asks why payment to the foreign supplier has not been made within 180 days, respond calmly with the following points:

1. The foreign supplier is not registered under GST.

2. The 180-day rule applies only to domestic GST invoices.

3. IGST on imports has already been paid to the Government.

4. The Bill of Entry is the governing document, not the commercial invoice.

5. FEMA timelines for payment do not affect GST credit.

Attach copies of the Bills of Entry and IGST challans.
In most cases, the matter ends there.

Planning advantage for businesses

Because the 180-day rule does not apply to imports, businesses working with tight cash cycles can:

• negotiate longer payment timelines,

• use supplier credit effectively,

• plan working capital better,

• avoid unnecessary cash blockages.

Your ITC remains intact and available from day one.

Conclusion

The GST law is very clear and logical on this subject.
If you have paid IGST at customs, your ITC is secure.
There is no requirement to reverse ITC on imports just because payment to the foreign supplier is delayed beyond 180 days.

Pre-Packaged Rice Supplied to Exporters Prior to Export Is Not Zero-Rated: A Hard Legal Line Between “Domestic Supply” and “Export Supply”

By CA Surekha S Ahuja

Introduction — A GST Misconception Finally Settled

For years, the agri-export ecosystem—especially rice millers, pulses traders, spice processors, and food-grain packers—worked under a deeply embedded assumption:

“If the supply is exclusively meant for export, every leg of the supply chain should also be zero-rated.”

The Gujarat AAR in Olam Agri India delivers a decisive corrective.

The legal position reaffirmed:

Zero-rating under GST applies only to the actual export as defined in Section 2(5) of the IGST Act.
Any supply before the goods physically cross India’s border remains a domestic supply, attracting the applicable GST.

This ruling has far-ranging implications for:

• Rice processors

• Agro-commodity exporters

• Garment exporters (fabric/trim suppliers)

• Diamond and jewellery exporters

• Pharmaceutical exporters

• Third-party exporters

• Job workers & logistics operators

• GST auditors and refund-sanctioning authorities

The AAR essentially draws a bright statutory boundary:

Export begins only when goods cross the customs frontier.
All pre-export supplies remain domestic.

Questions Before the AAR

The applicant sought GST clarity on three supply legs:

1. Export of pre-packaged and labelled rice ≤25 kg

2. Domestic supply on bill-to-ship-to basis to port

3. Supply to exporter’s factory before the export takes place

These required reading:

• Section 2(5) — export of goods

• Section 10 — place of supply

• Section 16 — zero-rated supply

• Notification 1/2017 (5% GST on pre-packaged rice)

• Notifications 40/2017 & 41/2017 (0.1% supplies to exporters)

Legal Framework — Statute vs. Industry Assumptions

3.1 Section 16 — Zero-Rated Supply

Permitted only for:

• Export of goods

• Supply to SEZ

Intention is irrelevant.
The event of export is what triggers zero-rating.

3.2 Section 2(5) — Export of Goods

Requires:

• Customs clearance

• Shipping bill

• EGM filing

• Physical movement outside India

Nothing short of physically crossing India’s territorial border qualifies.

3.3 Section 10 — Place of Supply

If:

• Supplier in India

• Buyer in India

• Delivery in India

→ Always a domestic supply
Later export by buyer is irrelevant.

3.4 Notification 1/2017

GST @ 5% on pre-packaged & labelled rice ≤25 kg.

3.5 Notifications 40/2017 & 41/2017

Concessional 0.1% supply to exporter is allowed only if:

• Exporter furnishes LUT/Bond

• Export occurs within 90 days

• Specific endorsement is made

• Documentary trail is intact

Supplies not meeting these conditions revert to normal GST.

Issue 1 — Export of Pre-Packaged Rice ≤25 kg

AAR Ruling

• Export itself is zero-rated.

• LUT or IGST-paid refund route available.

• Packaging status does not affect zero-rating.

Interpretation

GST is destination-based.

Thus, even taxable goods (pre-packaged rice) become zero-rated once exported.

Supported by:

• Deepak Spinners Ltd.

• AIFTP v. UOI

• All India Federation of Tax Practitioners

Issue 2 — Bill-to Ship-to to Port

Frequent industry misconception

If goods move straight to port, they must be zero-rated.

 AAR rejects this.

AAR Ruling

Supply remains domestic and taxable at 5%.

Legal reasoning

• Under Section 10(1)(b), delivery at an Indian port = delivery in India.

• Supplier’s supply obligation ends domestically.

• Export occurs only after customs clearance by the exporter.

Case Law Support

Case	Principle
Arcelor Mittal Nippon Steel	Movement to port is not export
Phoenix Industries	Export begins only after customs frontier
Mohit Minerals (SC)	Tax attaches to supply event, not intention

Not Deemed Export

Supplies are not covered under Section 147 notifications.
Hence, cannot be classified as deemed export.

Issue 3 — Supply to Exporter’s Factory

AAR Ruling

Taxable @ 5%.
Export intention irrelevant.

Legal foundations

1. Section 2(5)
   Goods have not left India → no export.

2. Two-event doctrine

   • Domestic supply

   • Export supply
     (Agarwal Industries, Bharat Fritz Werner)

3. Tax applies to supplier’s supply, not buyer’s intention

   • Canon India

   • Mohit Minerals (SC)

4. Strict construction of exemptions

   • Dilip Kumar & Co. (SC)

   • Bombay Dyeing

Arguments Typically Raised by Industry — And Why They Fail

Argument 1: “Goods are meant for export, so supply should be zero-rated.”

Fails because:
Purpose or end-use does not override statutory definition of “export”.

Argument 2: “Bill-to ship-to shifts place of supply to foreign destination.”

Fails because:
Place of supply under Section 10 is domestic.

Argument 3: “This is economically part of the export chain.”

Fails because:
GST is legally event-based, not purpose-based.

Argument 4: “Supplier should get deemed export benefit.”

Fails because:
Rice (and most commodities) are not covered in deemed-export notifications.

Broader Impact Beyond Agriculture (Garments, Jewellery, Pharma, Engineering)

The ruling affects:

Garment exporters

Fabrics, linings, lace, lehenga borders, trims supplied to factory before export → domestic supply @ GST
Only exporter can claim zero-rating.

Jewellery exporters

Gold bars supplied to jeweller for export orders → domestic supply until actual export.

Pharma exporters

APIs supplied to formulation units for export → domestic supply.

Engineering exporters

Components supplied to factories for export goods → domestic supply.

This AAR therefore sets a cross-industry precedent.

Applied Illustrations

Scenario Table

Scenario	Supply Type	GST	Zero-Rated?
1	Supplier → Exporter factory	5%	No
2	Supplier → Port (Bill-to exporter)	5%	No
3	Supplier → Foreign buyer (direct export)	LUT/IGST	Yes
4	Supplier → Exporter @ 0.1% under Notif. 40/41	Only if strict conditions met	Conditional

Example with Numbers (Illustrative)

Supplier sells ₹50,00,000 worth of rice:

1. To exporter’s factory → GST @ 5% = ₹2,50,000

2. Exporter exports under LUT → claims ITC refund later.

3. Supplier cannot issue zero-rated invoice.

This avoids wrongful refund claims and protects ITC chain integrity.

Compliance, Documentation & Audit Red Flags

For Suppliers

• Always apply GST @ 5% for pre-export domestic supplies.

• Issue tax invoice, not zero-rated invoice.

• Use 0.1% rate only with documentary evidence (LUT, 90-day export, endorsements).

For Exporters

• Do not insist on zero-rated invoices from suppliers.

• Retain full ITC for refund claims.

• Strongly maintain shipping bills, EGM, BRC, trail of movement.

Audit Red Flags

• Zero-rated invoices issued for pre-export legs.

• LUT used for domestic supplies.

• Refund claimed on inward supplies misclassified as “zero-rated”.

• Bill-to ship-to misused to avoid GST.

Authorities may invoke Section 74, interest and penalties.

Consolidated Case Law Support

Issue	Case	Principle
Pre-export movement not export	Arcelor Mittal	Port movement ≠ export
Intention irrelevant	Mohit Minerals (SC)	Tax attaches to supply event
Export begins only after customs frontier	Phoenix Industries	Export starts after clearance
Strict interpretation of exemptions	Dilip Kumar (SC)	No presumption of benefit
Purpose cannot alter supply classification	Canon India	Statute governs, not intention

Final Analysis — A Hard Legal Boundary is Re-Drawn

The AAR’s ruling reinforces the doctrinal clarity:

Zero-rating is not chain-based, not intention-based, and not destination-within-India-based.
It is triggered only when goods are physically exported.

Everything else—no matter how close it appears to the export chain—remains a domestic supply, attracting normal GST.

This ruling will now influence:

• GST audits

• Refund sanctions

• Supply chain tax planning

• Advisory positions in agri, textile, pharma & engineering sectors

It restores the boundary the GST law always intended:

Only the actual export is zero-rated. Every prior leg remains domestic.

Section 86B of GST: The Practical, Legal & Defensive Guide for Businesses

By CA Surekha S Ahuja

Section 86B of GST: The Practical, Legal & Defensive Guide for Businesses — Your Rights When the Department Overreaches

Section 86B has quietly become one of the most misunderstood provisions of the GST law. Many businesses are suddenly asked to pay a larger portion of their liability in cash, even when ample ITC exists in their books. Notices quote the provision without properly applying its exceptions, triggering unnecessary cash-flow stress and even demands that are legally incorrect.

This article gives you the cleanest, strongest, and most defensible understanding of Section 86B, along with legal interpretation, practical safeguards, and remedies when the department stretches the provision beyond the law.

The Core of Section 86B — The True Legal Position

Section 86B states that if the taxable turnover in a financial year exceeds ₹50 lakh, the registered person shall use at least 1% of the GST liability in cash, even if full ITC is available.

However, the law simultaneously provides broad and powerful exceptions.
If any one of the following applies, Section 86B cannot be invoked:

Statutory Exceptions

1. The taxpayer has paid income tax of more than ₹1 lakh in each of the last two financial years.

2. The taxpayer has received refunds exceeding ₹1 lakh on zero-rated supplies or inverted duty.

3. The taxpayer is a government department, PSU, local authority, or statutory body.

4. The managing partners/karta/proprietor have discharged income tax of more than ₹1 lakh in each of the last two years (as per Rule 86B’s structure).

Meaning:
If you or your business have paid income tax above ₹1 lakh in the last two years, Section 86B simply does not apply — and no officer can force it.

Linking GST with Income Tax — The Legal Interpretation That Matters

Section 86B is unique because it links a GST input restriction with income tax compliance history. The rule is designed to identify taxpayers with no income tax footprint, flagging them for higher scrutiny.

Therefore, the real trigger is:

Not turnover — but low or zero income tax in two consecutive years despite high outward supplies.

If the business has genuine profitability, pays regular taxes, or has historical refunds, the intention of Section 86B is already satisfied.

Common Overreach by the Department — Where Problems Begin

Field officers frequently invoke Section 86B mechanically, without verifying:

• past income-tax payments
• refund records
• nature of turnover
• exception conditions
• whether partners’ or proprietor’s ITR qualifies

This results in:

• blocking of ITC
• wrongful demands to pay 1% in cash
• system-generated notices without legal basis
• scrutiny-like questions under the guise of 86B

These actions are not supported by law and can be contested.

Your Strongest Legal Arguments When the Department Misapplies Section 86B

Argument 1 — Income Tax > ₹1 lakh automatically exempts the taxpayer

No discretionary authority exists once this statutory condition is met.

Argument 2 — Section 86B cannot override the fundamental right to ITC

Courts have repeatedly held that ITC is a statutory right; restrictions must be interpreted strictly and cannot be expanded by administrative direction.

Argument 3 — Burden of proving ineligibility lies on the department

The officer must prove that none of the exceptions under 86B apply.

Argument 4 — Turnover alone cannot trigger 86B

Exception conditions must be evaluated before insisting on cash payment.

Argument 5 — ITC cannot be denied on the basis of suspicion

If returns are regularly filed and taxes paid, imposing 86B is arbitrary.

Argument 6 — System-generated intimation is not a lawful basis for demand

86B cannot be mechanically triggered unless exception conditions are examined.

5. Safest Compliance Routes to Stay Fully Protected

1. Ensure income-tax consistency

Keep at least ₹1 lakh income tax discharged in each of the last two years (through advance tax, SA tax, or TDS). This single step neutralizes Section 86B.

2. Maintain documentation of refund sanctions

Copies of refund orders > ₹1 lakh for any year protect you automatically.

3. Keep partners’ and proprietor’s ITR copies ready

In partnerships and HUFs, their income-tax payment satisfies exception conditions.

4. Maintain a dashboard showing exception applicability

A simple compliance sheet stating the reason why 86B does not apply can be produced to any officer.

5. If turnover exceeds ₹50 lakh but tax payments are low

Plan income-tax payments strategically to maintain eligibility.

6. Avoid temporary spikes in turnover without corresponding tax declaration

This usually triggers automated scrutiny.

If the Department Still Stretches 86B — Your Best Remedies

Remedy 1: Respond with a legal representation quoting exception clauses

Attach documentary evidence:
• last two years’ ITR
• refund orders
• balance sheets showing tax payments

Remedy 2: Request revocation of wrongful system-blocks

Cite that 86B is a conditional restriction, not automatic.

Remedy 3: Use the “principles of natural justice” argument

The officer must evaluate facts before applying a restriction that impacts working capital.

Remedy 4: Appeal under Section 107

If a demand or restriction persists, the first appeal has strong merit because 86B exceptions are objective and provable.

Remedy 5: Writ petition where department misuses discretion

High Courts have granted relief where ITC denial or cash compulsion is mechanical or contrary to explicit rule exceptions.

Remedy 6: Seek rectification under Section 161 for system errors

Many 86B triggers arise from incomplete data pulled by the portal; rectification is allowed.

What Businesses Should Never Do (Critical to Avoid Red Flags)

• Do not suppress outward supplies hoping to avoid the ₹50 lakh threshold
• Do not ignore repeated requests for ITR copies; respond with proper exception documentation
• Do not pay “voluntary” cash if you legally fall under an exception
• Do not allow the officer to treat section 86B as a penalty provision (it is not)

Conclusion: Section 86B Is a Targeted Rule — Not a Blanket Restriction

Section 86B is designed to curb fake turnover and fraudulent ITC — not to penalize genuine taxpayers.
If your income tax, refunds, or partner-proprietor tax history satisfies the exceptions, you are legally outside the scope of 86B, regardless of turnover.

GST on Fancy Vehicle Number Auction by RTO — A Comprehensive Analytical Guide for Taxpayers

By CA Surekha S Ahuja 

Introduction: The GST Dilemma of Fancy Vehicle Numbers

The auction or allotment of fancy vehicle registration numbers by Regional Transport Offices (RTOs) has emerged as a critical interpretational challenge under GST. The fundamental issues revolve around taxability, charge mechanism (forward or reverse), applicable rate, ITC eligibility, interest liability, and the validity of Section 74 Show Cause Notices (SCNs).

This article provides an exhaustive legal, procedural, and judicial analysis to guide taxpayers and practitioners through this evolving and disputed domain.

Taxability of Fancy Number Auction — Supply or Sovereign Function?

The core question is whether the RTO’s activity of allotting a preferred or fancy registration number in exchange for a fee amounts to a “supply of service” under Section 7 of the CGST Act, 2017, or a sovereign regulatory function exempt from GST.

▪ Department’s Position:

• The activity involves granting a privilege or “right to use” a registration mark for consideration.

• Therefore, it qualifies as a supply of service, taxable under GST.

• Classified under Serial No. 35, Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 — “Other miscellaneous services not elsewhere classified” — taxable at 18% (9% CGST + 9% SGST).

▪ Taxpayer’s Argument:

• The fee is regulatory in nature, not consideration for a commercial service.

• RTO performs a sovereign function under the Motor Vehicles Act; such acts are not “in the course or furtherance of business.”

• Hence, the activity should be outside the scope of supply under Section 7(2) of the CGST Act, read with Schedule III.

▪ Legal Parallel:

The Supreme Court in Union of India v. Delhi Cloth & General Mills Co. Ltd. [(1963) AIR 791 (SC)] observed that sovereign functions do not constitute commercial activities. Similarly, various High Courts have held that fees for statutory permissions are not taxable unless rendered in a commercial capacity.

However, the departmental position under GST tends to treat such activities as supply of services where a “benefit” is conferred for consideration.

Forward Charge vs. Reverse Charge Mechanism (RCM)

The Show Cause Notices in these cases generally invoke Reverse Charge under Section 9(3) of the CGST Act read with Notification No. 13/2017-Central Tax (Rate).

▪ Reverse Charge Applicability:

Under Sl. No. 5 of Notification 13/2017:

Services supplied by the Central Government, State Government, Union territory, or local authority to a business entity are taxable under RCM, except for renting, postal, or transportation services.

Thus:

• If recipient is an individual (non-business) → Service exempt under Notification No. 12/2017, Sl. No. 6.

• If recipient is a business entity → Liable to pay GST under RCM at 18%.

▪ Forward Charge Non-Applicability:

Since RTO (State Government authority) is not a taxable person in this case, forward charge mechanism does not apply unless the department treats the auction as a “commercial activity.”

Input Tax Credit (ITC) Eligibility

Where GST is paid under RCM, the recipient (taxpayer) can claim ITC subject to Section 16(2) conditions:

1. Self-invoice issued under Section 31(3)(f);

2. Service actually received;

3. Tax paid to government;

4. Return filed under Section 39.

However, Section 17(5) may restrict ITC on motor vehicles unless used for:

• Transportation of goods or passengers;

• Training of drivers; or

• Further supply (e.g., dealer in vehicles).

Hence, ITC is not available for vehicles used for personal or non-business purposes.

Interest Liability — Section 50

If tax is payable under RCM but not discharged timely, interest at 18% per annum applies under Section 50(1).

Key points:

• Interest is automatic and compensatory, not penal (as held in Daejung Moparts (P) Ltd. v. UOI [2022-VIL-60-DEL]).

• Computed from the day after due date till the date of payment.

• Payable even if liability admitted later or voluntarily under Section 74(5).

 Section 74 SCN — Fraud or Interpretation Dispute?

Most Show Cause Notices invoke Section 74(1), alleging “suppression of facts” for failure to pay GST under RCM. However, the legal sustainability of such notices is highly debatable.

▪ Legal Requirements:

Section 74 applies only when tax short-paid is due to fraud, willful misstatement, or suppression of facts.

Courts have repeatedly held:

• Mens rea (intent to evade) must be proven. (Safecon Lifescience v. UOI, Allahabad HC)

• Interpretational ambiguity cannot be treated as suppression. (Century Metal Recycling (P) Ltd. v. UOI, Delhi HC)

• CBIC Instruction (13.12.2023) mandates material evidence of fraud before invoking Section 74.

Thus, where taxability itself is uncertain and subject to ongoing CBIC deliberation, invocation of Section 74 is unjustified. Instead, proceedings should fall under Section 73 (non-fraud cases).

▪ Limitation:

For FY 2018–19:

• Due date of annual return: 31.12.2019

• Order must be passed by: 31.12.2024

• SCN must be issued by: 30.06.2024

Any SCN issued beyond this period is time-barred.

Advance Ruling and Judicial Precedents

▪ Pydi Ganesh Chandra Babu (AAR Andhra Pradesh, 2018)

The applicant sought clarity on taxability and rate of GST on fancy numbers auctioned by RTO. The application was withdrawn before hearing, and hence, no ruling was delivered. This indicates the uncertainty even at the administrative level.

▪ Tribunal/High Court Observations:

While no GST-era appellate tribunal ruling specifically addresses fancy number auctions, courts in related contexts (e.g., spectrum auction, mining rights) have observed that granting a privilege by government for consideration may fall within the ambit of taxable supply if done commercially, but not when part of sovereign regulatory functions.

Key Reference:

• Union of India v. Mineral Area Development Authority [(2011) 4 SCC 450] — Governmental royalties and permissions must be examined in light of legislative intent and regulatory character.

Hence, the taxability of fancy numbers remains legally unsettled.

State-wise Approaches and Ongoing Ambiguity

State	Approach Taken	Rate Applied	Mechanism	Legal Status
Delhi	SCN issued to Transport Dept by CGST	18%	RCM	Contested
Haryana	SCN issued to business entities	18%	RCM	Under adjudication
Uttar Pradesh	Levy proposed up to 28%	18–28%	RCM	Pending CBIC clarification
Tamil Nadu & Maharashtra	Maintain exemption stance	NIL	–	Disputed

This inconsistent treatment across jurisdictions reflects the absence of a uniform policy and underscores the taxpayer’s right to claim bona fide interpretational defense.

Visual Compliance Decision Matrix: Is GST Payable on Fancy Vehicle Number?

Scenario	Supplier	Recipient	Mechanism	GST Rate	ITC Availability	Remarks / Action
Individual buying fancy number for personal car	State Government (RTO)	Individual	Exempt (Notification 12/2017, Sl. 6)	Nil	Not Applicable	Sovereign, non-business use
Company buying fancy number for official fleet	State Government (RTO)	Registered business entity	Reverse Charge (Notification 13/2017, Sl. 5)	18%	Available if vehicle used for business	Ensure self-invoicing and ITC compliance
Vehicle dealer securing fancy number for resale	State Government (RTO)	Registered dealer	Reverse Charge	18%	Available	Treated as business expenditure
Auction of special numbers to raise revenue	State Government	Public / Bidders	Possibly outside supply (sovereign function)	Nil (disputed)	–	Interpretational ambiguity persists

 Taxpayer’s Action Points and Defenses

1. Challenge Section 74 invocation — Absence of mens rea, bona fide interpretational doubt, and lack of CBIC clarification.

2. Assert sovereign function argument — Allotment of registration mark is regulatory, not commercial.

3. Seek clarification or advance ruling — To establish tax position proactively.

4. Claim ITC if applicable — For vehicles used exclusively in business.

5. Ensure limitation compliance — Verify SCN timelines per Section 74(10).

6. Consider settlement options — Pay tax + interest + 25% penalty within 30 days of SCN to conclude proceedings (Section 74(8)).

Emerging Development — Section 74A (Prospective Reform)

The 53rd GST Council Meeting (June 2024) recommended insertion of Section 74A, harmonizing timelines for all SCNs irrespective of fraud or non-fraud. Though effective prospectively (Nov 2024), it aims to streamline disputes like the present case.

Conclusion: The Unresolved GST Landscape

The issue of GST on fancy number auctions by RTOs continues to be legally ambiguous and administratively inconsistent. The core disputes—whether it’s a sovereign act or taxable supply, the rate (18% or 28%), and mechanism (RCM)—remain unresolved as of November 2024.

Key takeaways for taxpayers:

• Until CBIC or the GST Council issues a clear circular, taxpayers can legitimately rely on the interpretational defense.

• RCM liability, if any, should be complied with prospectively with self-invoicing and ITC documentation.

• Section 74 invocation is questionable absent fraud evidence.

• Interest is automatic but limited to delay periods.

• Future rulings or CBIC circulars are expected to harmonize treatment across states.

In essence, this issue exemplifies the tension between regulatory governance and tax policy — demanding judicial clarity to ensure consistency, fairness, and certainty for taxpayers across India.

The Golden Equation: How to Earn More and Risk Less Across Gold Formats

The Changing Face of Gold Investment

Gold has evolved from temple vaults to digital wallets and from ornamental pride to an asset of portfolio strategy. Yet, the core question persists — which form of gold delivers the best balance of safety, liquidity, cost efficiency, and returns?

The answer lies not in emotional preference but in structured analysis. Today’s investors have four distinct routes — Physical Gold, Digital Gold, Gold Exchange Traded Funds (ETFs), and Sovereign Gold Bonds (SGBs). Each carries unique advantages and trade-offs. Understanding these nuances can transform a casual purchase into a well-informed financial decision.

The Four Faces of Gold — An Analytical Comparison

Format	Asset Backing & Security	Liquidity	Cost & Taxation	Return Potential	Best Suited For
Physical Gold (Jewellery, Coins, Bars)	Tangible, self-held asset	Moderate; resale involves purity checks and making charge deductions	3% GST on purchase, making charges, storage costs	Follows market price; no interest	Traditional savers, emotional or legacy value
Digital Gold	Backed by 24K gold held by vendor; not regulated by SEBI or RBI	Platform-dependent; limited external liquidity	3% GST plus spread of 2–3% each side	Tracks gold price; limited oversight	Small-ticket convenience buyers
Gold ETFs	Fully backed by physical gold of 99.5% purity, stored in RBI-approved vaults	High; traded on NSE/BSE	No GST; 0.4–0.8% expense ratio	Mirrors gold price with transparent pricing	Active investors, startups, and institutional buyers
Sovereign Gold Bonds (SGBs)	Issued by RBI; fully guaranteed by Government of India	Medium; 8-year tenure, tradable after 5 years	No GST; capital gains exempt on maturity	Gold price appreciation plus 2.5% annual interest	Long-term investors and wealth planners

Are Gold ETFs Truly Backed by Real Gold?

Yes. Every Gold ETF unit is backed by physical gold of 99.5% purity stored in accredited custodian vaults, typically maintained by major banks such as ICICI Bank, HDFC Bank, and HSBC. These holdings are audited by independent firms and valued daily based on London Bullion Market Association (LBMA) benchmarks.
Investors thus hold a proportionate share in actual physical gold, eliminating the counterparty risk inherent in digital gold platforms.

In essence, ETFs combine the safety of physical backing with the liquidity of securities, providing a transparent, exchange-regulated route to own gold.

Comparative Overview of Major Gold ETFs in India (as of November 2025)

ETF	AUM (₹ crore)	Expense Ratio	1-Year Return	5-Year CAGR	Key Insight
Nippon India ETF Gold BeES	12,000+	0.80%	~60%	~18.7%	Largest and most liquid ETF with consistent tracking
SBI Gold ETF	6,000+	0.70%	~60%	~18%	Strong institutional backing and liquidity
Kotak Gold ETF	4,700+	0.55%	~59%	~14%	Low cost; moderate AUM
ICICI Prudential Gold ETF	4,500+	0.50%	~58%	~14%	Efficient management and robust governance
HDFC Gold ETF	4,500+	0.59%	~61%	~14%	Balanced cost–return structure

The trend is clear: liquidity and fund size are as critical as nominal cost. Larger ETFs provide narrower bid–ask spreads and more efficient pricing, ensuring investors can enter or exit without value erosion.

Scenario-Wise Suitability: Choosing the Right Gold for the Right Need

Scenario	Most Suitable Form	Rationale
Short-term liquidity seekers (3–12 months)	Gold ETF or Digital Gold	Easily tradable; minimal lock-in
Long-term wealth builders (5–8 years)	Sovereign Gold Bonds	2.5% interest plus tax-free maturity gain
Startups and SMEs managing treasury	Gold ETFs	Mark-to-market valuation, regulated, liquid
Legacy and inheritance planners	Physical Gold + SGB mix	Combines tangible and income-generating assets
Young investors building discipline	Digital Gold transitioning to ETF	Convenience initially, regulation later
Inflation and currency hedge seekers	Gold ETFs or SGBs	Stable long-term protection against rupee depreciation

Cost–Return–Risk Perspective

Format	Cost Level	Return Potential	Risk Exposure
Physical Gold	High	Moderate	High (storage, purity, resale)
Digital Gold	Moderate to High	Moderate	Medium (platform risk)
Gold ETFs	Low	Moderate to High	Low
SGBs	Low	High (interest + price gain)	Very Low (sovereign guarantee)

Gold ETFs and SGBs consistently emerge as the most efficient instruments, combining transparency, cost-effectiveness, and long-term security.

Strategic Insights for Optimizing Gold Exposure

1. Allocate intelligently:
Gold performs best as 10–15% of an overall portfolio, serving as an inflation and volatility hedge rather than a return driver.

2. Corporate and startup allocation:
ETFs offer institutional-grade liquidity, accurate valuation for accounting, and quick convertibility—ideal for businesses managing working capital or reserves.

3. Blend SGBs with equities for long-term portfolios:
The interest income of SGBs complements equity appreciation, reducing volatility while enhancing compounded returns.

4. Separate consumption from investment:
Jewellery or decorative gold should not be treated as a financial asset; it lacks liquidity, yields, and price transparency.

The Optimized Gold Allocation Model

A well-balanced gold strategy often follows the ratio:
60% in Sovereign Gold Bonds, 30% in Gold ETFs, and 10% in Physical Gold.

This composition ensures:

• Sovereign protection with interest income

• Market liquidity via ETFs

• Tangible legacy value through physical gold

Historical back-testing shows such a blend outperforms standalone physical holdings by nearly 1.5% CAGR while lowering liquidity and custodial risks.

Conclusion — Gold as a Strategic Asset

Gold is no longer a monolithic investment. It is a portfolio of options. Each format serves a different financial purpose — some offer emotional comfort, others deliver liquidity or sovereign assurance.

The intelligent investor of 2025 does not merely accumulate gold; they allocate it strategically — across forms, tenures, and goals.
Digital ease may attract, but regulatory protection and physical backing sustain wealth.
Ultimately, the real power of gold lies not in its glitter, but in the wisdom of how one holds it.