Summary:

The Gujarat Appellate Authority for Advance Ruling (‘GAAAR’) has upheld the ruling of the Gujarat AAR holding that Input Tax Credit (‘ITC’) on common inputs and input services used in relation to subscription and redemption of Mutual Funds (‘MF’) is subject to reversal under Section 17(2) of the CGST Act. The Authority held that transactions in securities including MF, are to be treated as “exempt supplies” by virtue of Section 17(3) of the CGST Act. Accordingly, the value of such transactions i.e., computed as 1% of the sale/redemption value, must be included while calculating the proportionate ITC reversal.

Facts:

• The Appellant utilized surplus business funds by subscribing to MF schemes and redeems them when liquidity is required
• ITC is availed on common inputs and input services used both for taxable supplies and for activities relating to such subscription and redemption of MF units
• The Appellant approached the Gujarat Authority for Advance Ruling (‘the GAAR’) seeking clarification on the said transaction wherein it was held that the Applicant was not eligible to avail ITC on inputs and input services used in relation to the subscription and redemption of MF and was also required to reverse the ITC on common inputs and input services used in relation to the expenditure incurred for the said activity

Issues before the GAAAR:

• Whether the Appellant is eligible to avail ITC of tax paid on common inputs and input services used in relation to the subscription and redemption of MF
• Whether transactions in MF are to be included in the value of “exempt supplies” for the purposes of Section 17(2) and (3) of the CGST Act, 2017

Discussion and Ruling:

• MF units are “securities” under Section 2(h)(id) of the Securities Contracts (Regulation) Act, 1956, and “securities” are excluded from the scope of goods and services under Sections 2(52) and 2(102) of the CGST Act
• A conjoint reading of Section 17(3) of the CGST Act and the Explanation to Chapter V of the CGST Rules, 2017 implies that transactions in securities, including MF, are to be included in the value of exempt supply. The deeming fiction created by Section 17(3) mandates inclusion of such transactions for the purpose of computing proportionate ITC reversal
• Applying the common parlance test, redemption of MF is nothing but sale of MF units back to the Asset Management Company (AMC)
• Even if the activity of subscription and redemption of MF is in the course or furtherance of business, the ITC used in relation thereto is subject to the condition mentioned under Section 17 of the CGST Act
• Based on the above, the GAAAR upheld the ruling of the GAAR that the Appellant is:
  • Not eligible to avail ITC of tax paid on inputs and input services used in relation to the subscription and redemption of MF; and
  • Required to reverse the ITC on common inputs and input services used in relation to the subscription and redemption of MF.

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