Startup Share-Issue Expenses: What Is Deductible, What Must Be Capitalised, and Can GST Credit Be Claimed

By CA Surekha Ahuja

A startup raises ₹5 crore through a private placement and incurs legal, valuation, company-secretarial, ROC and placement-agent fees. Can these costs be deducted from taxable profits? Can they be written off over five years? Can the GST paid on these services be claimed as input tax credit?

The answer depends on the transaction, the nature of each expense and the specific statutory provision. Costs directly attributable to issuing fresh equity are generally capital expenditure and are not deductible under Section 34 of the Income-tax Act, 2025. Section 44 permits amortisation only of specified expenditure satisfying its conditions. GST input tax credit requires a separate analysis under Sections 16 and 17 of the CGST Act, 2017.

The distinction matters because a genuine business expense is not necessarily a tax-deductible expense.

1. Start with the transaction

Expenditure	General treatment
Private placement, seed funding or VC round	Direct equity-issue costs are capital; no general deduction under Section 34
IPO or FPO	Specified public-issue expenses may qualify for amortisation under Section 44
QIP	Eligibility requires separate examination of the statutory conditions and judicial precedents
Increase in authorised capital for a fresh issue	Capital expenditure
Bonus issue	Revenue treatment supported by Supreme Court authority
Bank loan or other borrowing	Borrowing costs are generally revenue expenditure, subject to applicable provisions
Routine annual secretarial and compliance services	Generally deductible as revenue expenditure, where incurred for business purposes

Where an invoice covers both share-issue work and routine compliance, obtain a proper service-wise breakup. The invoice heading alone does not determine the tax treatment.

2. Why private-placement expenses are not deductible

The Supreme Court has settled the central principle: expenditure incurred to issue fresh shares and increase a company’s capital is capital expenditure, even if the funds are required for business operations.

In Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC), the Court held that expenditure incurred in connection with a fresh share issue was capital in nature.

The distinction is reinforced by two other decisions:

• Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC): ROC fees for increasing authorised share capital are capital expenditure.

• India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC): expenditure incurred to raise a loan is distinguishable from expenditure incurred to issue fresh equity.

A startup cannot claim a deduction merely because the money raised is used for salaries, marketing, product development or working capital. The purpose for which the funds are ultimately used does not, by itself, change the capital character of the share-issue expenditure.

Practical treatment: Direct costs of a private equity round should generally be excluded from the Section 34 deduction. If charged to the profit and loss account, they should ordinarily be added back in the tax computation.

3. When does Section 44 allow five-year amortisation?

Section 44 of the Income-tax Act, 2025, corresponding broadly to Section 35D of the 1961 Act, is a limited statutory relief. It does not permit every capital expense incurred in raising funds to be written off over five years.

For companies, the relevant categories include specified incorporation expenses and certain costs of an issue of shares or debentures for public subscription.

The public-issue category covers specified expenditure such as:

• Underwriting commission.

• Brokerage.

• Charges for drafting, typing and printing the prospectus.

• Prospectus advertising expenses.

The claim remains subject to the applicable conditions, including the nature of the expense, the relevant commencement or expansion requirements, the statutory ceiling and the prescribed period of deduction.

The five-year treatment is therefore not available merely because an expense relates to an IPO.

What about QIP expenses?

A QIP requires a separate legal assessment.

In Yes Bank Ltd. v. DCIT (2020) 183 ITD 721 (Mumbai ITAT), the Tribunal allowed a claim under the former Section 35D on the facts before it, considering the public character of the QIP.

The decision is relevant but should not be treated as a blanket entitlement. The statutory conditions and the nature of each expense must be examined before claiming amortisation.

Is Form 5 required?

Form 5 under the Income-tax Rules, 2025, relates to the statement prescribed for qualifying preliminary expenditure under Section 44(2)(a). It is not a universal filing requirement for every Section 44 claim.

The applicable filing requirement and deadline should be verified for the relevant tax year.

4. Accounting treatment is separate from tax deductibility

For companies following Ind AS, qualifying incremental costs directly attributable to an equity transaction are generally deducted from equity under Ind AS 32, net of the related tax benefit where applicable. Costs of an abandoned equity transaction are recognised as an expense.

For companies following the applicable Accounting Standards, the treatment must be determined under the relevant framework. Section 52(2)(c) of the Companies Act, 2013 permits securities premium to be applied towards writing off specified expenses of an issue of shares or debentures.

The accounting entry does not decide the tax deduction. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), the Supreme Court confirmed that accounting treatment does not determine tax liability.

Accordingly:

• A capital expense debited to the profit and loss account does not become deductible merely because it has been written off.

• An expense adjusted against securities premium must still be examined independently under the Income-tax Act.

• A capital cost cannot be converted into a depreciable asset merely by recording it as one.

5. GST: can input tax credit be claimed?

The issue of shares is not itself a supply of goods or services under the CGST Act. However, the professional services purchased for a share issue may attract GST.

The GST treatment of the service and the eligibility to claim input tax credit are separate questions.

Expense	GST point
CA, CS, valuation and investment-banking fees	Generally taxable at the applicable rate
Legal services	Examine the applicable reverse-charge provisions and exemptions
ROC fees	Verify whether the particular fee falls within the relevant exemption
Stamp duty	A statutory levy, not consideration for a taxable professional service
Foreign legal or advisory services	Examine import-of-services conditions and IGST reverse charge

The ITC issue

Sections 16 and 17 of the CGST Act govern input tax credit and its restrictions.

In Gujarat Narmada Valley Fertilizers & Chemicals Ltd., the Gujarat AAAR, by order dated 22 September 2025 in Appeal No. GUJ/GAAAR/APPEAL/2025/17, denied ITC on expenses connected with a share buyback and addressed reversal of common credit.

That decision concerned a buyback, not a fresh issue. The distinction is relevant, but it does not by itself establish that ITC on fresh share-issue expenses is admissible.

Before claiming material credit, the company should document the service received, its business use, compliance with Section 16, the effect of Section 17 and any applicable common-credit reversal.

Practical approach: Do not assume that ITC is automatically available because the service supports the business. Equally, do not treat a ruling on a buyback as automatically deciding every fresh-issue case. The position should be assessed and documented on its facts.

6. What the CFO should do before closing the funding round

Maintain one expense schedule that identifies:

• The transaction and the purpose of each service.

• The invoice amount, GST particulars and vendor.

• The distinction between equity-issue costs, borrowing costs and routine business expenses.

• The accounting treatment and the corresponding tax adjustment.

• The statutory basis for any Section 44 claim, including the applicable ceiling and filing requirements.

• The GST and ITC position, including reverse charge, exemptions and common-credit reversal.

This exercise should be completed before finalising the financial statements, income-tax computation and GST returns.

A funding round can bring cash into the business without creating a corresponding tax deduction for the cost of raising it.

For a private placement, the starting point is clear: direct costs of issuing fresh equity are generally capital expenditure. Section 44 offers limited relief for specified expenditure, not a general five-year write-off for fundraising costs. GST credit must be assessed independently.

Classify the transaction first, establish the tax treatment second, and document the GST position separately. That is the practical way to avoid an unsupported deduction, an incorrect accounting adjustment or a disputed input tax credit claim.

GST ITC Accumulation: Blocked Credit or Missed Refund Opportunity

 By CA Surekha S Ahuja

A practical framework for businesses with exports, domestic taxable supplies and exempt income

A business may have substantial ITC on its GST portal but very little domestic output GST against which to utilise it.

This is common where the business has a combination of:

Exports + domestic taxable supplies + exempt services.

But an accumulated ITC balance does not automatically mean that the credit is blocked or lost.

The first question should be:

What is the nature of the ITC and what does the GST law permit us to do with it?

Do not treat the ITC as one pool

ITC relates to	Broad treatment
Zero rated exports	Evaluate refund of eligible unutilised ITC
Domestic taxable supplies	Utilise against output GST
Exempt supplies	Reverse attributable ITC as applicable
Common expenses	Apportion between taxable, zero rated and exempt activities

This classification is the starting point.

The Legal Framework

Section 16 of the IGST Act

Exports are zero rated supplies. Eligible ITC can be used in relation to zero rated supplies and, subject to the prescribed conditions, unutilised eligible ITC may be refunded where exports are made without payment of IGST.

Section 54 of the CGST Act

Provides the statutory framework for claiming refund, including refund of eligible unutilised ITC arising from zero rated supplies.

Rule 89(4)

For exports made without payment of IGST, the refund is determined using the prescribed formula based on zero rated turnover, Net ITC and adjusted total turnover.

Therefore:

₹20.20 lakh closing ITC ≠ ₹20.20 lakh automatic refund.

The refund has to be determined for the relevant period and after applying the statutory conditions and exclusions.

Section 17 and Rule 42

Where common inputs and input services are used for taxable and exempt supplies, the portion attributable to exempt supplies requires appropriate reversal.

The Immediate Action Plan

Step 1 — Establish the real ITC

Reconcile:

GSTR 2B → Purchase Register → ITC Ledger → GSTR 3B → Electronic Credit Ledger

Do not rely only on the GST portal closing balance.

Step 2 — Tag the ITC

Every material credit should be classified:

E — Export

D — Domestic taxable

X — Exempt

C — Common

Step 3 — Identify leakage

Check specifically for:

• Ineligible ITC
• Excess or duplicate credit
• Exempt supply related ITC
• Rule 42 reversals
• Incorrectly availed credit
• Capital goods and other separately treated credits

Step 4 — Quantify the export refund

Calculate the eligible refund period wise under Rule 89(4).

Do not simply apply today's export ratio to the accumulated balance.

Step 5 — Optimise utilisation

Use eligible ITC against domestic taxable output GST wherever available.

Step 6 — Introduce periodic monitoring

The objective should be to prevent ITC from becoming a large unmanaged balance.

A Simple ITC Management SOP

Frequency	Control
Monthly	Reconcile 2B, books and 3B
Monthly	E/D/X/C classification
Monthly	Review exempt supply reversals
Monthly	Monitor export related ITC
Periodically	Calculate potential refund
Before refund	Verify LUT, exports and supporting documents
Quarterly	Management review of accumulated ITC

Maintain one ITC Master Register:

Invoice → Vendor → GST → Expense → Business Activity → E/D/X/C → Reversal → Refund Eligibility → Utilisation

This creates a clear audit trail and makes refund claims easier to substantiate.

What Management Should Avoid

Do not create domestic taxable sales merely to consume ITC.

Do not assume the entire credit balance is refundable.

Do not retain ITC attributable to exempt activities without examining reversal requirements.

Do not allow export related ITC to accumulate indefinitely without evaluating refund.

Do not mix export, domestic and exempt ITC in one management pool.

The ITC Dashboard Every Exporter Should Have

Particulars	Amount
ITC appearing in ledger	₹20.20 lakh
Less: Ineligible ITC	To determine
Less: Exempt attributable ITC	To determine
Eligible ITC	To determine
Export attributable ITC	To determine
Domestic utilisable ITC	To determine
Potential refund	To determine

The purpose is not simply to bring down the ITC balance.

It is to determine the maximum legally recoverable value.

The Bottom Line

For a business with exports, domestic taxable supplies and exempt services, accumulated ITC should be managed through four distinct routes:

Export ITC → Refund

Domestic taxable ITC → Utilisation

Exempt ITC → Reversal

Common ITC → Apportionment

The right question is therefore not:  “How will we consume our accumulated ITC?”

It is:  “How much should be utilised, how much should be refunded, how much should be reversed and how much can legitimately remain as credit?”

That is the difference between having ITC and actually managing its value

GST Business Protection Series – Part 2 Building a GST Risk-Proof Business Framework

 By CA Surekha S. Ahuja

From Vendor Selection to Litigation Protection - Turning GST Compliance into a Strategic Business Governance System

“The costliest mistake in business is not always a wrong decision; sometimes it is a right decision taken without a proper system of protection.”

The evolution of GST has changed the way businesses must look at compliance.

Earlier, GST compliance was largely considered a responsibility of the tax department — preparing returns, reconciling data and responding to notices. However, the changing judicial environment, especially the interpretation of Section 16(2)(c) of the CGST Act, has created a new business reality.

A genuine transaction supported by an invoice, payment proof and receipt of goods or services may still face challenges if the supply chain partner does not maintain proper GST compliance.

The message for businesses is clear: GST compliance is no longer only a tax function. It has become a business protection function.

Businesses must now move from: Vendor Compliance to Vendor Governance

GST Filing to GST Risk Management -  Transaction Recording to Transaction Protection

Your Vendor Is Now a Part of Your GST Risk Management Framework

Traditionally, businesses focused on: ✔ Purchase order, ✔ Invoice verification, ✔ Receipt of goods or services, ✔ Payment to vendor

However, GST risk management requires a wider approach.

A vendor is not merely a supplier of goods or services.

A vendor is a compliance partner whose actions can impact your Input Tax Credit and business continuity.

Therefore, vendor selection should not be based only on price and commercial terms.

It should also consider:

• GST compliance discipline
• Business credibility
• Filing behaviour
• Tax payment history
• Ability to provide supporting documentation

From Vendor Verification to Vendor Governance

A strong GST protection framework begins before the first transaction.

Businesses should establish a structured vendor governance process:

Area	Recommended Business Practice
Vendor onboarding	Verify GST registration, PAN, business credentials and basic compliance history
Contract stage	Include GST compliance responsibilities and indemnity clauses
Purchase stage	Ensure proper invoices and supporting documents
Monthly monitoring	Review ITC availability and vendor compliance status
Payment process	Link vendor payments with compliance risk review
Risk classification	Identify critical and high-risk vendors

The objective is simple:  Prevent GST disputes before they arise.

GST Due Diligence Before Entering Into Business Relationships

One of the biggest mistakes businesses make is reviewing vendors only after receiving a GST notice.

A proactive organisation follows:

Prevention before Litigation

Important checks may include:

✔ Valid GST registration
✔ Filing regularity
✔ Business existence
✔ Nature of business activity
✔ Consistency between supplies and returns
✔ Past compliance concerns

A few minutes of due diligence at the beginning can protect years of business operations.

GST Protection Through Strong Agreements

Many businesses have detailed commercial agreements but ignore GST protection clauses.

Vendor agreements should clearly provide:

• Responsibility for GST compliance
• Timely filing of GST returns
• Cooperation during departmental proceedings
• Protection of Input Tax Credit
• Indemnity for losses arising due to vendor default

A purchase order should not only answer: “What will be supplied?”

It should also answer: “How will GST risk arising from this transaction be protected?”

Technology: The Future of GST Risk Management

With increasing transaction volumes, manual monitoring is no longer sufficient.

Businesses should develop technology-based GST controls such as:

• Automated ITC reconciliation
• Vendor compliance dashboards
• Exception reporting
• Risk-based vendor classification
• Early warning systems

The future of GST compliance will be driven by:  Data + Technology + Governance

GST Risk Is a Management Responsibility

GST exposure is no longer limited to the tax team.

For businesses with significant transactions, GST risk should become a part of internal governance.

Management should periodically review:

• Major Input Tax Credit exposure
• Vendor concentration risk
• Pending GST disputes
• High-risk suppliers
• Compliance gaps

A strong organisation does not wait for a notice. It builds systems that reduce the possibility of receiving one.

Documentation: The Strongest Defence in GST Litigation

In GST proceedings, the strongest defence is not merely:

“We acted honestly.”  The stronger defence is:  “We followed a documented and reasonable business process.”

Businesses should preserve:

✔ Purchase orders
✔ Agreements
✔ Tax invoices
✔ Delivery records
✔ Payment proofs
✔ Vendor communications
✔ Compliance review records

A properly documented transaction is a protected transaction.

The GST Business Protection Checklist

Every business should periodically evaluate:

Question	Status
Do we verify vendors before onboarding?	Yes / No
Do our agreements contain GST protection clauses?	Yes / No
Do we monitor vendor compliance regularly?	Yes / No
Do we maintain complete ITC documentation?	Yes / No
Are GST risks reported to management?	Yes / No

Conclusion

The GST journey has moved beyond calculation of tax liability.

The new question for every business is:  “How effectively can we protect our business from GST risk?”

The successful businesses of tomorrow will not only be those who comply with GST provisions.

They will be those who create:  A culture of compliance, A system of governance, And a framework of protection.

GST compliance is no longer a back-office activity. It is a strategic business protection mechanism. 

“A business is not protected merely because it follows the law; it is protected when it builds systems that prove its commitment to compliance.”

Supreme Court Section 16(2)(c) GST Judgment: Why Every Business Needs a Vendor Governance Framework

The GST Business Protection Series – Part 1- From GST Compliance to Vendor Governance

Turning a Supreme Court Judgment into a Business Protection Framework

By CA Surekha S Ahuja

The Supreme Court has settled the law. Now businesses must strengthen the systems behind every purchase.

“Every invoice carries a tax consequence. But every vendor carries a business risk.”

The Biggest GST Risk May Enter Before the Invoice Does

Businesses have invested significantly in strengthening:

✓ Statutory audit systems
✓ Financial reporting controls
✓ ERP processes
✓ Tax compliance mechanisms
✓ Internal audit frameworks

However, one critical area often remains under-governed:

The Vendor Ecosystem

Every vendor brings more than goods or services.

A vendor also brings:

• GST compliance risk
• Financial risk
• Operational risk
• Regulatory exposure
• Reputation risk

The recent judgment of the Supreme Court of India upholding Section 16(2)(c) of the CGST Act, 2017 has highlighted a fundamental business reality:

ITC protection does not begin in the GST return. It begins when the vendor is selected.

The Supreme Court Message: ITC Is Now a Supply Chain Responsibility

The controversy around Section 16(2)(c) revolved around a critical question:

Should a genuine buyer suffer when a supplier fails to discharge GST obligations?

The Supreme Court has upheld the statutory framework under which Input Tax Credit remains subject to fulfilment of prescribed conditions, including the requirement relating to payment of tax by the supplier to the Government.

The practical business message is clear:

A company cannot evaluate vendors only on:

• Price
• Quality
• Delivery capability

It must also evaluate:

• Compliance behaviour
• Filing discipline
• Financial credibility
• Regulatory history

The question for businesses is no longer:

❌ “How do we defend ITC after receiving a notice?”

The right question is:

✅ “How do we prevent the wrong vendor from creating an ITC dispute?”

From Vendor Management to Vendor Governance

Traditional approach:

Find Vendor → Negotiate Price → Receive Invoice → Claim ITC

The new approach:

Verify Vendor → Assess Risk → Approve Vendor → Monitor Compliance → Protect ITC

The Supreme Court judgment has effectively moved vendor compliance:

From the back office to the boardroom — making supplier governance a matter of corporate risk management.

The Vendor Risk Transfer Principle™

Every business believes it purchases:

• Goods
• Services
• Quality
• Delivery

But every vendor also brings:

• Tax behaviour
• Compliance history
• Financial strength
• Regulatory exposure
• Business reputation

Therefore:

A purchase order is not merely a commercial document. It is an acceptance of business risk.

Introducing the Vendor Governance Framework™

Vendor management is no longer enough.

Businesses need a structured:

Vendor Governance Framework

covering the complete vendor lifecycle:

Vendor Due Diligence
↓
Vendor Approval
↓
Risk Classification
↓
Contract Protection
↓
Purchase Controls
↓
Invoice Verification
↓
Payment Controls
↓
Vendor Audit
↓
Continuous Monitoring

The objective is not merely to create a vendor master.

The objective is:

To create a trusted business ecosystem.

The Purchase Protection Principle™

A simple but powerful principle:

“Every invoice reaches Accounts much later than the vendor enters the organisation. Therefore, the first line of ITC protection is Procurement — not Accounts.”

By the time Finance receives an invoice:

• Vendor selection is complete.
• Commercial commitments are already made.
• Business risk has already entered.

Therefore: 

Prevention must begin before procurement approval.

The Vendor Firewall™

Modern organisations already have:

✓ Cyber Firewall
✓ Data Firewall
✓ Financial Controls

But today's businesses need another protection layer:

Vendor Firewall

Nothing should enter the organisation without verification.

The Three Lines of Defence for Vendor Governance

Defence	Key Responsibility
Procurement	Vendor selection, due diligence and approval
Finance & Tax	GST verification, ITC monitoring and reconciliation
Internal Audit	Independent testing and vendor audit

A strong control environment requires all three functions to work together.

Why Vendor Audit Must Become a Business Necessity

Most organisations conduct:

✓ Statutory Audit
✓ Tax Audit
✓ Internal Audit

But an important question remains:

Who audits the parties creating the purchase liabilities?

Vendor audit is not a replacement for statutory audit.

It is a preventive control that strengthens the foundation on which financial statements and tax positions are built.

Vendor audit provides assurance over:

GST & Tax Controls - ✓ ITC mismatch risks - ✓ Supplier compliance behaviour - ✓ Invoice authenticity - ✓ E-invoice compliance

Financial Controls - ✓ Duplicate payments -✓ Unauthorised vendors -✓ Billing accuracy

Business Controls - ✓ Supplier capability - ✓ Operational continuity - ✓ Documentation discipline

The New Corporate Mantra

Old Thinking	New Thinking
Lowest Price Vendor	Lowest Risk Vendor
Vendor Registration	Vendor Governance
Claim ITC	Protect ITC
Compliance After Purchase	Compliance Before Procurement

Conclusion

The Supreme Court Has Settled the Law. Businesses Must Now Strengthen Their Systems.

The Section 16(2)(c) judgment is not merely a GST development.

It is a reminder that modern businesses must govern their entire supply chain.

The future belongs to organisations that understand:

Every purchase decision is a tax decision.
Every vendor decision is a risk decision.
Every invoice is a governance decision.

The strongest organisations will not be those that fight GST disputes better.

They will be those that build systems where disputes are prevented before they arise.

A robust Vendor Governance Framework will help businesses:

✓ Protect Input Tax Credit
✓ Reduce litigation exposure
✓ Strengthen procurement discipline
✓ Improve internal controls
✓ Protect cash flows
✓ Enhance audit readiness

The Supreme Court has settled the law. Now every business must settle its vendor governance.

Coming Next: Part 2

The Ultimate Vendor Audit & Purchase Governance SOP

100+ Practical Controls to Protect Every Rupee of Input Tax Credit

Part 2 will cover:

✓ Vendor Due Diligence Checklist
✓ Vendor Risk Rating Matrix
✓ GST Verification Framework
✓ GSTR-2B Reconciliation SOP
✓ Purchase Approval Controls
✓ Payment Release Controls
✓ CFO Dashboard
✓ Board Reporting Format
✓ Exception Management System
✓ 30-Day Implementation Roadmap

GST ITC on Rooftop Solar Power Plants: Strategic Guide to Successfully Claim and Defend Input Tax Credit

Practical Roadmap for Industries, Commercial Buildings, CAM Structures, Leasing Models and Business Owners (Part 2)

By CA Surekha S. Ahuja

"A successful GST Input Tax Credit claim is not created when a notice is received. It is created when the solar project is planned, structured, documented and operated correctly from the beginning."

In Part 1A of this series, we discussed the legal foundation governing GST Input Tax Credit (ITC) on rooftop solar power plants and examined the importance of Sections 16 and 17 of the CGST Act.

The key principle emerging from the discussion was:

The GST treatment of a rooftop solar power plant depends not merely on the installation of solar equipment, but on the purpose for which the electricity generated is used and its connection with taxable business activities.

However, for businesses, the practical question begins after understanding the law:

How should a taxpayer structure the solar project so that the ITC claim is commercially and legally sustainable?

A rooftop solar project may involve significant investment and substantial GST outflow on:

• Solar modules;
• Inverters;
• Transformers;
• Mounting structures;
• Electrical equipment;
• Engineering, procurement and construction (EPC) services;
• Installation and commissioning activities.

A well-planned structure can preserve valuable ITC, whereas poor documentation or an inappropriate business arrangement may result in avoidable disputes.

This article provides a practical roadmap for industries, commercial property owners, landlords and business operators.

Start With the Business Model: Who Will Consume the Solar Power?

Before installing the solar plant, management should answer the most important question:

Who will ultimately consume the electricity generated from the solar plant?

The GST position can vary significantly depending upon the answer.

Model 1: Manufacturing Unit – Captive Consumption

This is generally one of the strongest factual situations.

Example: A manufacturing company installs rooftop solar panels on its factory premises. The electricity generated is used for:

• Production machinery;
• Factory operations;
• Processing activities;
• Storage facilities;
• Other manufacturing support functions.

The business chain is clear:

Solar Plant → Electricity Generation → Manufacturing Activity → Taxable Goods → GST-Paid Supply

Professional View

Where solar power directly supports the manufacture of taxable goods, the business nexus is generally easier to establish.

The taxpayer should maintain evidence demonstrating that the solar power contributes to taxable manufacturing operations.

Commercial Buildings: The CAM and Renting Strategy

For commercial properties, the analysis requires greater planning.

The strongest position generally arises where the solar power plant supports facilities maintained by the landlord as part of taxable renting services.

Examples:

• Common area lighting;
• Lifts and escalators;
• Fire safety systems;
• Security systems;
• Water pumps;
• Common HVAC systems;
• Parking facilities;
• Other shared amenities.

The commercial linkage can be demonstrated as:

Solar Plant → Common Facilities → Maintenance of Commercial Property → Taxable Renting/CAM Services

Why CAM Documentation Becomes Critical

For commercial properties, GST officers often examine the relationship between:

• Lease agreements;
• CAM agreements;
• Electricity arrangements;
• Tenant billing.

A properly drafted CAM structure should clearly establish:

• The landlord is providing taxable maintenance and facility services;
• Common facilities are maintained by the landlord;
• Solar power supports those common facilities;
• The arrangement is not merely a separate supply of electricity.

Practical CAM Precautions

Avoid vague descriptions such as: 

"Electricity reimbursement"

or

"Solar electricity charges"

without explaining the underlying service.

Such wording may create questions regarding whether the landlord is making an independent supply of electricity.

Preferable Documentation Approach

CAM agreements should clearly identify services such as:

• Maintenance of common areas;
• Operation of lifts;
• Security services;
• Common electricity consumption;
• Facility management.

The commercial substance should reflect taxable facility management services.

Tenant Electricity Arrangement: A Critical Decision Point

Commercial property owners should carefully evaluate:

Stronger position:

• Tenants obtain electricity directly from the distribution company;
• Solar power is consumed for landlord-controlled common facilities;
• Rent and CAM charges are subject to GST.

Higher complexity:

• Landlord generates solar electricity;
• Electricity is separately supplied or recovered from tenants.

The second arrangement requires careful GST evaluation.

Build the Plant and Machinery Position Properly

A rooftop location alone should not determine the character of the asset. The taxpayer should maintain evidence that the solar installation functions as an independent electricity generation system. Important documents include:

• EPC agreement;
• Technical specifications;
• Single-line electrical diagram;
• Layout drawings;
• Commissioning certificate;
• Photographs;
• Equipment details.

The objective is to demonstrate the commercial and technical identity of the solar plant.

Accounting and GST Records Must Tell the Same Story

A frequent weakness during audits is inconsistency.

For example:

EPC Contract: "Solar Power Generation System"

Fixed Asset Register: "Building Improvement"

Such inconsistencies invite unnecessary questions. The description should be aligned across:

• Agreements;
• Invoices;
• Fixed asset register;
• Financial statements;
• GST records.

Create a Solar ITC Defence File

Large projects should maintain a dedicated documentation file.

Document	Purpose
EPC Agreement	Establish nature of project
Tax invoices	Evidence of GST payment
Technical drawings	Support Plant and Machinery position
Commissioning report	Evidence of completion
Electricity generation reports	Establish actual use
Meter records	Demonstrate consumption
Lease agreements	Establish renting activity
CAM agreements	Establish taxable services
Internal approval note	Explain business purpose
Photographs	Physical evidence

Pre-Implementation GST Review for High-Value Projects

For projects involving substantial GST amounts, businesses should consider reviewing:

• Ownership structure;
• EPC contract;
• Electricity flow;
• Tenant arrangements;
• CAM structure;
• Accounting treatment.

A preventive review is generally more valuable than defending a dispute later.

Practical Decision Matrix

Solar Usage Model	ITC Position	Key Consideration
Manufacturing captive consumption	Strong	Direct link with taxable production
Warehouse/logistics operations	Strong	Business use needs documentation
Commercial common facilities	Strong with proper CAM structure	Taxable renting linkage
Separate electricity supply to tenants	Complex	Requires detailed analysis
Mixed taxable and exempt usage	Requires review	Possible reversal implications
Third-party supply	Higher complexity	Nature of outward supply

Comprehensive FAQs

Can ITC be claimed on the complete rooftop solar project?

The analysis is not restricted only to solar panels. It may cover eligible goods and services forming part of the solar project, subject to GST conditions and applicable restrictions.

Is captive consumption by manufacturers the safest model?

Captive consumption for taxable manufacturing generally provides a strong factual basis because the nexus between input and taxable output is direct.

Can commercial landlords claim ITC on rooftop solar plants?

Yes, where the solar power supports taxable renting activities and common facilities, subject to fulfilment of GST conditions and proper documentation.

Can ITC be claimed where tenants consume electricity?

The facts are critical.

The arrangement should be examined carefully, particularly where electricity is separately supplied or recovered from tenants.

Can a tenant claim ITC on a solar plant installed on rented premises?

It depends upon:

• Ownership;
• Control;
• Business use;
• Contractual rights;
• Nature of installation.

What if solar power is partly used for taxable and exempt activities?

The taxpayer should evaluate proportionate reversal requirements and maintain proper records.

What if excess electricity is exported to the grid?

The GST implications depend upon the arrangement and nature of the transaction.

Separate analysis may be required.

Can ITC be claimed under a RESCO/OPEX solar model?

The analysis differs because ownership of the plant and nature of services received become relevant.

Is technical documentation really important?

Yes. During scrutiny, technical evidence often becomes as important as legal arguments.

Should businesses obtain a GST opinion before installation?

For large projects, a documented GST position note is advisable.

Final Professional Checklist

Before claiming ITC, ensure:

✓ Business use is established.
✓ Electricity flow is documented.
✓ EPC agreement is reviewed.
✓ Plant and Machinery position is supported.
✓ CAM agreements are aligned.
✓ Tenant arrangements are analysed.
✓ Accounting records are consistent.
✓ Generation and consumption records are maintained.
✓ GST position is documented.

Professional Conclusion

Rooftop solar projects represent a significant opportunity for businesses to reduce energy costs while supporting sustainability goals. However, from a GST perspective, the success of an ITC claim depends upon much more than payment of GST on solar equipment.

A sustainable ITC position requires alignment of:

Project Structure + Electricity Usage + Taxable Business Nexus + Documentation

For manufacturers, captive consumption of solar power for taxable production generally provides the clearest pathway.

For commercial property owners, properly structured renting and CAM arrangements can significantly strengthen the ITC position.

The most important lesson is:

GST planning should begin before the solar plant is installed. The strongest ITC claims are built through proactive structuring, not reactive litigation.

GST Input Tax Credit on Rooftop Solar Panels for Industrial and Commercial Buildings: When Is ITC Available Under GST

Guide with Sections 16 & 17, Judicial Principles and Practical Insights (Part 1A)

By CA Surekha S. Ahuja

"A rooftop solar power plant may generate electricity, but under GST, it is the purpose for which that electricity is used—not the installation itself—that determines whether Input Tax Credit is available."

India's rapid transition towards renewable energy has led industrial units, business parks, warehouses, logistics parks, commercial complexes and shopping malls to invest heavily in rooftop solar power plants. Besides reducing electricity costs and promoting sustainability, these projects involve substantial GST on solar panels, inverters, mounting structures, transformers, cables, installation and commissioning services.

For many taxpayers, the GST paid on such projects may run into several lakhs or even crores of rupees. Naturally, the first question before approving the investment is:

Can the GST paid on the purchase and installation of a rooftop solar power plant be claimed as Input Tax Credit (ITC)?

The answer is Yes—but not merely because GST has been paid on the purchase of the solar plant.

Under the GST law, the availability of ITC is determined by how the solar power plant is used in the business and whether it has a direct and proximate nexus with taxable outward supplies. Thus, two taxpayers installing identical rooftop solar plants may arrive at completely different GST outcomes depending upon the manner in which the electricity generated is utilised. This distinction is central to the statutory framework and the authorities discussed in the source material.

This article examines situations where GST Input Tax Credit is generally available on rooftop solar power plants. Situations where ITC is restricted or denied due to exempt electricity supplies and Rule 43 reversals will be discussed separately in Part 2.

Key Takeaways

Before examining the legal provisions, the following principles deserve attention:

✔ ITC on rooftop solar power plants is not automatic.

✔ Section 16 of the CGST Act creates the entitlement to ITC, subject to fulfilment of statutory conditions.

✔ Section 17 determines whether that entitlement is restricted or blocked.

✔ Where solar power is consumed for common facilities supporting taxable renting or business activities, the legal position is generally favourable for ITC.

✔ Proper documentation, technical design and contractual arrangements are often as important as the statutory provisions themselves.

Why GST Planning Should Begin Before Installing the Solar Plant

A rooftop solar power project is no longer a routine capital expenditure. Depending upon the capacity of the plant, the investment may range from a few lakh rupees to several crores.

The GST component itself may therefore be substantial.

A wrong position on ITC can result in:

• Recovery of wrongly availed ITC.
• Interest liability.
• Penalty, wherever applicable.
• Increased project costs.
• Long-drawn GST litigation.

Professional Insight

Many taxpayers focus only on reducing electricity costs while evaluating a solar project. Equally important is evaluating the GST implications before the EPC contract is finalised. A properly structured project can significantly reduce future litigation and improve overall project economics.

Section 16 – The Foundation of Every ITC Claim

Every discussion on GST Input Tax Credit begins with Section 16 of the Central Goods and Services Tax Act, 2017.

In substance, Section 16 provides that every registered person is entitled to take credit of GST charged on goods or services used or intended to be used in the course or furtherance of business, subject to fulfilment of the prescribed conditions.

This provision establishes three important legal principles.

1. ITC Is a Statutory Entitlement

Input Tax Credit is not a discretionary concession granted by the tax department.

Once the statutory conditions prescribed under the GST law are fulfilled, Section 16 recognises the taxpayer's entitlement to claim ITC.

However, this entitlement is not absolute. It remains subject to the restrictions contained elsewhere in the Act, particularly Section 17.

Accordingly, every ITC analysis should follow a two-step approach:

Step 1: Determine whether Section 16 creates the entitlement.

Step 2: Examine whether Section 17 restricts or blocks that entitlement.

Ignoring either step often results in an incorrect legal conclusion.

2. Business Use Is the Governing Test

The GST law does not ask:

"Has the taxpayer purchased a rooftop solar power plant?"

Instead, it asks:

"Is the rooftop solar power plant being used in the course or furtherance of the taxpayer's business?"

The emphasis is therefore on business use, not merely on ownership of the asset.

3. Capital Goods Are Eligible for ITC

A rooftop solar power plant is ordinarily a capital asset. That fact, by itself, does not prevent the availment of ITC. The GST law permits ITC on capital goods, provided:

• the conditions of Section 16 are fulfilled; and
• no specific restriction under Section 17 applies.

Statutory Conditions for Availing ITC

Even where the solar power plant is otherwise eligible, the following conditions should be satisfied:

Requirement	Practical Compliance
GST Registration	The recipient should be registered under GST.
Valid Tax Invoice	Invoice should comply with the GST law.
Receipt of Goods and Services	The solar power plant should be installed and received.
Tax Paid by Supplier	Subject to statutory compliance under the GST framework.
Return Filing	Relevant GST returns should be furnished.
Time Limit	ITC should be claimed within the prescribed statutory time limit.
Business Use	The plant should be used in the course or furtherance of business.

Failure to comply with these statutory requirements may jeopardise the ITC claim even where the project is otherwise eligible.

The Most Important Question Under GST

Most taxpayers ask:

"Is ITC available on solar panels?"

From a legal perspective, that is not the correct question. The correct question is:

"For what purpose is the electricity generated by the rooftop solar power plant ultimately used?"

This distinction lies at the heart of the GST law.  The same rooftop solar power plant may qualify for full ITC, proportionate ITC, or no ITC at all, depending upon the nature of the outward supplies that it supports.

When Does the Law Generally Support Full ITC?

The strongest case for ITC arises where:

• a landlord owns an industrial or commercial property;
• a rooftop solar power plant is installed on that property;
• the electricity generated is consumed exclusively for common facilities; and
• those common facilities form part of the taxpayer's taxable renting or maintenance services.

Typical examples include electricity used for:

• Common lighting.
• Lifts and elevators.
• CCTV systems.
• Security infrastructure.
• Fire-fighting systems.
• Water pumps.
• Common HVAC systems.
• Parking areas.
• Landscape lighting.
• Other common amenities maintained by the landlord.

In such circumstances, the rooftop solar power plant is not generating an independent outward supply of electricity. Instead, it functions as an input used for providing taxable renting and maintenance services. The uploaded material discusses this distinction as the basis for favourable ITC treatment.

Understanding the Relationship Between Sections 16 and 17

Many disputes arise because taxpayers read Section 16 in isolation. The correct approach is to read Sections 16 and 17 together.

Step 1: Section 16 asks whether the inward supply is used in the course or furtherance of business.

Step 2: Section 17 asks whether any part of that inward supply is used for making exempt supplies or for purposes specifically blocked by law.

Only after answering both questions can the availability of ITC be determined.

Why Section 17(2) May Not Restrict ITC in This Situation

Section 17(2) restricts ITC where goods or services are used partly for taxable supplies and partly for exempt supplies.

However, where:

• electricity generated by the rooftop solar plant is consumed solely for common facilities;
• no separate electricity is supplied to tenants from that generation; and
• the landlord raises GST on rent and common area maintenance charges,

there may be no separate exempt outward supply of electricity attributable to the rooftop solar power plant.

Accordingly, on these facts, the restriction contemplated by Section 17(2) may not arise. This legal reasoning is reflected in favourable rulings dealing with common-area consumption supporting taxable renting activities.

Professional View

During GST audits, the tax authorities often examine the actual flow of electricity, metering arrangements, CAM agreements and the commercial substance of the transaction. Proper documentation demonstrating that the solar power is used exclusively for common taxable facilities significantly strengthens the taxpayer's position.

ITC on Canteen Services: The Complete Decision Guide for Indian Businesses

By CA Surekha Ahuja

Whether your factory canteen qualifies for GST input tax credit (ITC) depends on a few critical facts—not assumptions. GST on canteen services remains one of the most litigated ITC issues for manufacturers. While Section 17(5) of the CGST Act generally blocks ITC on food, beverages, and catering services, a statutory factory canteen may qualify for credit where specific legal and factual conditions are satisfied.

The key is to determine whether the statutory exception applies and whether adequate documentation exists to support the claim during audit or assessment.

The Legal Framework

Under Section 17(5)(b)(i) of the CGST Act, ITC on food and beverages and outdoor catering services is generally blocked. However, the proviso to Section 17(5)(b) permits ITC where the inward supply is obligatory for an employer to provide to its employees under any law for the time being in force.

For factories, Section 46 of the Factories Act, 1948 and the applicable State Rules require certain factories employing the prescribed number of workers to provide and maintain a canteen facility. Where this statutory obligation exists, the restriction under Section 17(5)(b) may not apply, subject to fulfillment of all other conditions under GST law.

Further, Circular No. 172/04/2022-GST clarified that the proviso applies to the entire clause (b) of Section 17(5), including canteen services. This clarification has significantly strengthened the position of taxpayers claiming ITC on statutory canteens.

However, the exception under Section 17(5) does not automatically guarantee ITC. Taxpayers must still satisfy the conditions prescribed under Section 16 of the CGST Act, including possession of a valid tax invoice, receipt of services, payment of tax by the supplier, and compliance with return filing requirements.

Decision Framework: Four Questions Before Claiming ITC

Before claiming ITC on canteen services, evaluate the following:

Question	If Yes	If No
Is the canteen mandatory under applicable law?	Proceed to next test	ITC may remain blocked under Section 17(5)(b)
Is the canteen maintained primarily for employees in discharge of a statutory obligation?	Stronger ITC position	Additional evaluation required
Is the cost substantially borne by the employer?	Simpler ITC position	Employee recoveries require separate analysis
Are adequate records available to support the claim?	Defensible claim	Significant audit risk

A taxpayer should ideally satisfy all four tests before claiming ITC on canteen services.

Common Scenarios and Their Likely ITC Position

Situation	ITC Position	Key Action
Statutory canteen, regular employees only, employer bears full cost	Strongest position	Maintain complete statutory and GST records
Statutory canteen with employee contribution	Generally supportable, subject to position adopted	Document recoveries and supporting rationale
Statutory canteen serving employees and contract workers	Additional litigation risk	Maintain reasonable allocation methodology
Voluntary canteen without statutory requirement	Generally blocked	Evaluate carefully before claiming
Multi-location entity with centralized vendor invoice	Allocation required	Maintain location-wise workings
Canteen serving only contract workers	High litigation risk	Obtain specific legal evaluation before claiming

Employee Recoveries and Contract Workers

Many businesses recover a nominal amount from employees through salary deductions, meal coupons, or direct recoveries. While this does not necessarily defeat the ITC claim, it introduces additional GST considerations and documentation requirements. Many taxpayers adopt a conservative approach by restricting ITC to the employer-borne portion of the expenditure.

Where contract workers also use the canteen facility, the position becomes more litigative. While several rulings have adopted a restrictive approach in relation to contract labour, the issue is not entirely free from dispute. Businesses should therefore maintain separate records of employee and contract-worker usage wherever feasible and adopt a reasonable allocation methodology supported by documentation.

The objective should not be to maximize ITC, but to ensure that the claim remains sustainable under scrutiny.

Subsidy Model vs Recovery Model

Particulars	Employer Bears Full Cost	Employee Contribution Exists
ITC position	Generally simpler	Requires additional evaluation
Documentation burden	Lower	Higher
Reconciliation requirements	Minimal	Greater
Litigation exposure	Lower	Potentially higher
Employer cash outflow	Higher	Lower

From an ITC perspective, the strongest position generally exists where the employer bears the entire canteen cost and maintains clear supporting documentation.

Outsourced Caterers and Vendor Models

Today, most factories engage third-party caterers rather than operating canteens themselves. Where an external caterer or canteen contractor charges GST on the invoice, the charging of GST alone does not automatically make ITC available.

Eligibility continues to depend upon:

• Whether the canteen is mandatory under the applicable law.
• Whether the conditions of Section 16 are satisfied.
• Whether the exception under Section 17(5)(b) applies.
• The category of users availing the facility.
• The treatment adopted for employee recoveries, if any.

Accordingly, GST charged by the contractor is only one requirement for claiming ITC. It does not override the restrictions contained in Section 17(5) of the CGST Act.

Practical Position

Situation	ITC Position
External caterer charges GST for a statutory canteen maintained for employees	Generally the strongest case for claiming ITC, subject to Sections 16 and 17(5)
External caterer charges GST for a voluntary employee canteen	GST charged by the vendor alone does not make ITC eligible
Employees and contract workers use the same outsourced facility	Appropriate allocation and documentation required
Employee recoveries exist	GST implications and supporting documentation should be evaluated

Third-Party Vendor vs Self-Managed Canteen

Particulars	Third-Party Caterer	Self-Managed Canteen
GST documentation	Simpler	More complex
Audit trail	Stronger	Requires detailed internal controls
Compliance burden	Lower	Higher
Input tracking	Easier	More challenging
Suitability	Large and multi-location factories	Businesses seeking greater operational control

The Strongest ITC Case Looks Like This

✓ Factory covered by statutory canteen requirements.

✓ Canteen maintained primarily for employees.

✓ Employer bears the entire cost.

✓ GST charged by a registered caterer or canteen contractor under a valid tax invoice.

✓ Invoice reflected in GSTR-2B.

✓ Proper vendor agreement and supporting records maintained.

✓ Complete documentation establishing the statutory obligation.

✓ No material gaps in GST compliance or reconciliations.

Compliance Checklist

Before claiming ITC, ensure that the following records are available:

✓ Proof of applicability of statutory canteen requirements.

✓ Internal legal note documenting the basis of eligibility.

✓ Vendor agreement defining the scope of services.

✓ Valid GST invoices and GSTR-2B reconciliation.

✓ Employee and contract-worker headcount records.

✓ Details of canteen recoveries, if any.

✓ Allocation workings where multiple user categories exist.

✓ Attendance records, swipe logs, coupon records, or equivalent evidence.

✓ Monthly finance-approved ITC computation workings.

✓ Proper record retention for future audits and assessments.

Documentation Matrix

Document	Purpose
Factory registration and worker-count records	Establish statutory obligation
Applicable State Rule / legal note	Demonstrate legal requirement
Vendor agreement	Define service scope
GST invoice and GSTR-2B reconciliation	Support Section 16 compliance
Employee recovery records	Support treatment adopted
Contract-worker records	Support allocation methodology
Attendance or usage records	Evidence of actual utilization
Monthly ITC workings	Support quantum of credit claimed

Quick Reference

Position	Typical Scenario
Strongest ITC Position	Statutory canteen + employees + employer bears cost + GST charged by registered caterer
Position Requiring Additional Analysis	Employee recoveries from canteen users
Position Requiring Allocation	Employees and contract workers using the same canteen
Higher-Risk Position	Voluntary canteen or claims lacking adequate statutory and documentary support

Key Takeaway

The availability of ITC on canteen services depends less on the fact that GST has been charged and more on whether the canteen is being provided in discharge of a statutory obligation and whether the claim can be supported with proper records.

The smartest strategy is to claim only what is legally supportable, operationally traceable, and adequately documented. A well-structured and evidence-backed position is far more valuable than an aggressive claim that may later result in reversals, interest, penalties, and avoidable litigation.