Public Listing Of Shares Is Similar To Trading Of Securities: Indian Tax Authorities

Indian tax authorities said that the public listing of shares (by a company) is similar to the trading of securities, which is spared from taxation as per GST provisions. Hence, the taxation body argued that treating IPO listing as security trading is not an apt interpretation since the incoming funds from the IPO are used for furthering the business, which is not free from GST liability.

Going forward with this, the authorities have begun issuing notices to more than 150 listed companies, which went public after July 2017, asking them to reverse tax credit claiming expenses for listing their shares on Indian bourses, sources told the Economic Times. 

According to Section 17(2) and 17(3) of the Central GST Act 2017, a portion of input tax credit permitted for taxable supply cannot be claimed on goods or services, which are spared from taxation. Such tax credits if claimed need to be reversed.

“…companies need to reverse the credit that they claimed. We have already sent notices to a few companies and more will be sent soon,” a senior tax official said. 

Interestingly, another government official shared that tax authorities have sent about 24 notices to listed companies seeking the reversal of tax credits since November 2022.

According to experts, reversing tax credits (in listed companies) would add up to a significant tax liability, affecting the cumulative funding secured by companies via IPO listing.  

Between July 1, 2017 (when the GST regime was introduced) and December 2022, about 168 companies went public raising more than INR 3.10 Lakh Cr, according to Prime Database. 

Before, tax authorities took a similar action under the former service tax regime. They perceived that the IPO was a transaction in securities and thus, asked listed companies to reverse their credit claims in return for that. 

Previously, tax authorities also issued notices to major private equity fund managers operating in India asking details of their proceeds and assets abroad. They had asked for detailed information about the income source, earnings outside India and calculation of the entire income.  

The move came as the authorities planned to levy PE fund managers on the profits they earn while exiting investments.

Requesting changes in indirect and direct tax regimes, industry body IndiaTech.org wrote to the country’s finance ministry urging to slash GST for some services and revision of TDS charging for various sectors including ecommerce, among others. 

Notably, in the financial year 2021, 16 profitable homegrown unicorns paid INR 1,276 Cr as income tax to the Indian government. These include Bill Desk, Dream11, GupShup, MamaEarth and EaseMyTrip, among others.