GST ITC on IPO Expenses: Fresh Issue, OFS and Common Costs

Summary: GST input tax credit on IPO expenses principally depends on whether the relevant goods or services are used for the company’s own business or relate to selling shareholders. In a fresh issue where funds are raised by the company for its business, ITC is generally supportable subject to Section 16 and other conditions. In a pure Offer for Sale (OFS), the company receives no issue proceeds and expenses attributable to selling shareholders should ordinarily not be claimed by the company. Where an IPO combines a fresh issue with an OFS, common expenses should be allocated between the company and selling shareholders on a reasonable and documented basis. Section 17, including the treatment of transactions in securities for ITC reversal purposes, and Rules 42/43 may become relevant where credit relates to taxable and exempt activities. Specific blocked credits under Section 17(5), the 180-day payment requirement under Rule 37, Section 16(4), GSTR-2B matching, correct GSTIN and invoice allocation also require attention. Companies should maintain the offer agreement, engagement letters, cost-allocation workings, objects-of-issue documentation, invoices, payment evidence and applicable ITC reversal computations.

GST Input Tax Credit on IPO Expenses

1. The basic idea

Simple rule: ITC is allowed only if the expense is for your own business. If the service benefits someone else (like a selling shareholder), the company cannot take ITC on it.

• Section 16 allows ITC when goods or services are used for business, you hold a valid tax invoice, the supplier has paid the tax, and it shows in GSTR-2B.
• Section 17 blocks ITC for non-business use, for exempt supplies and for specific items (like food and gifts).
• Selling or issuing shares is not a “supply” of goods or services. But for ITC reversal, “transactions in securities” are counted as exempt supply (Section 17(3)). So a company that earns income from selling securities may need to reverse some ITC under Rules 42/43.
• How the cost is booked in accounts (for example, adjusted against securities premium) does not matter. Only who benefits matters.

2. Scenario-wise position

Fresh issue (company raises money) — ITC to company: Yes, generally

The money comes into the company and is used in its business. The department may argue “shares are exempt, so no ITC”. Our answer: issuing own shares is not a supply, and the cost supports the business. Risk is higher if the money is used to repay loans or invest in subsidiaries. Keep a note linking the issue to business use.

Pure Offer for Sale (OFS) (existing holders sell) — ITC to company: No

The company gets no money. The services benefit the sellers. Do not claim ITC. If the company pays first, recover the cost from sellers. To avoid GST on the recovery, act as a “pure agent” (Rule 33): invoice in sellers’ names, no mark-up.

Promoter sells stake (individual) — ITC to company: No

An individual selling shares is not doing business, so there is no business use. No ITC for the promoter on this cost.

Promoter sells stake (company / LLP promoter) — ITC to company: Mostly No

The sale of shares counts as exempt for ITC purposes. ITC linked to it must be reversed (Rules 42/43).

PE / VC / Government selling — ITC to company: Depends on seller

Same logic as above. It is the seller’s issue, not the company’s. The company should only bear its own

share of the cost.

Fresh issue + OFS together (most common) — ITC to company: Only on company’s share

Split every cost between the company and the sellers as per the offer agreement (usually in proportion to shares issued vs sold). Costs only for the company, such as listing fees, can be claimed fully. Write down the basis of the split for each cost.

3. Other situations you may face

• IPO cancelled or delayed: ITC stays, because the goods or services were “intended to be used” in business. Keep proof that the IPO was genuinely planned (board resolution, DRHP filing).
• Bank / NBFC issuer: Section 17(4) applies: either claim 50% of eligible ITC, or follow the attribution method. Choose one and stay with it.
• Company with taxable and exempt income: The IPO cost is “common credit”. Apply Rules 42/43 to find how much to reverse.
• Holding / investment company: High risk. Its main activity is holding securities, so the department may say all ITC relates to exempt activity.
• Rights issue, QIP, preferential issue, pre-IPO placement: Same as a fresh issue. Generally ITC is available.
• SME IPO: Same rules. Amounts are smaller, but documentation is equally important.
• InvIT / REIT: Check who is registered and who is named on the invoice. The trust and the manager may be different persons.
• Listing through a scheme or direct listing: No fixed rule. Check each expense on who benefits.

4. Cost-wise view (company’s share)

Usually ITC allowed

• Merchant banker (BRLM) and underwriting fees
• Legal counsel fees
• Registrar to the issue
• Auditor and certifier fees
• Printing and advertising
• Stock exchange listing fees
• Depository fees, credit rating
• Monitoring agency, escrow, syndicate and bank charges

Blocked or doubtful

• Food and catering at roadshows or meetings (Section 17(5)(b))
• Gifts or freebies to investors (Section 17(5)(h))
• Club memberships
• Personal or promoter travel
• D&O insurance (check if blocked under 17(5)(b))
• Anything meant for selling shareholders

Other points

• SEBI fees: usually no GST is charged, so there is no ITC. Check the invoice.
• Foreign lawyers or bankers: company pays IGST under reverse charge. ITC on it follows the same test as above.

5. Common mistakes to avoid

• 180-day rule (Rule 37): if a vendor is paid more than 180 days after invoice (common when fees are paid from IPO proceeds), ITC must be reversed with interest. It can be taken again once paid.
• Last date (Section 16(4)): claim ITC by 30 November following the financial year.
• GSTR-2B: if the vendor has not filed correctly, ITC does not show. Merchant bankers often have mismatches, so follow up.
• Wrong GSTIN or joint invoice: invoices must carry the company’s GSTIN. For joint invoices (company and selling shareholders), ask for a clean split.
• Claiming everything: the simplest way to invite a Section 73/74 notice.

6. Documents to keep ready

• Offer agreement and engagement letters
• Cost allocation sheet (company vs sellers, with basis)
• Objects of the issue note
• Invoices, payment proofs, GSTR-2B matching
• Rule 42/43 working, if applicable