Summary: The listing process of company shares often involves raising funds through both Initial Public Offerings (IPO) and Offer for Sale (OFS), where the latter allows promoters to sell existing shares. According to Rule 42 of the CGST Act, 2017, companies must reverse proportionate common input tax credit (ITC) used for both taxable and exempt supplies. When a company avails of legal and professional consultancy services for the listing process, the GST input credit on these services is included in their GST returns. However, funds raised through OFS do not come into the company for business use but are taken directly by promoters, classifying them as exempt supplies. As a result, companies are required to reverse the GST credit proportionately to the OFS portion of the funds. For example, if the total funds raised are 5000 Crores, with 4000 Crores from IPO and 1000 Crores from OFS, and the total GST input credit is 2 Crores, the company must reverse 20% of the GST credit, amounting to 40 lacs. This adjustment ensures that the GST credit aligns with the funds that are actually used for business purposes. State GST Departments are closely monitoring companies with OFS in their listings and are issuing notices to reverse the proportionate GST credit accordingly.
Let’s understand some GST law implications for the company just after the IPO listing process of its shares. We are all aware of Rule 42 of the CGST Act 2017, which deals with the reversal of proportionate common ITC used for making both taxable and exempt supplies. Assessees have to reverse the “common GST credit” in the ratio of the exempt turnover portion.
There is a relation of this GST rule after the share listing process.
We know that some companies issue new shares (IPO) along with some offer for sale (OFS) portion. So, the total funds raised during the listing process sometimes include the OFS portion along with the IPO portion.
OFS is a method that allows promoters/large investors of public companies to sell their shares through a stock exchange’s bidding platform.
To make the listing process of their shares, the company has to avail a huge amount of “legal/professional consultancy services,” and on these services, “GST input credit” is involved, which is availed by the company in their respective GST returns.
The OFS portion fund is the exempt portion for the calculation of Rule 42 of the CGST Act, 2017, because this portion of the fund is directly taken home by the promoters (against selling their held shares) instead of this fund coming into the company for business use. So, the entity has to “reverse the credit” availed for the listing process in the ratio of the “OFS fund portion,” because the entity has availed the total GST input, but the total amount of the fund has not come to the company to use in the business. So, the portion of the fund that was not used in business will be the exempt ratio for making the reversal of proportionate GST credit.
Let’s understand the above theory with an example:
The total money raised during the listing process is 5000 Crores. Out of this, 4000 (80%) Crores belong to the new fresh shares issue, i.e., IPO, and the remaining 1000 (20%) Crores belong to the offer for sale (OFS), i.e., already issued shares which are held by promoters. The total GST input credit that is available on professional/legal consultancy services availed for the listing process is about 2 Crores.
So, the entity has availed the total GST credit of 2 Crores for making their whole listing process, and for each company, the purpose of raising the fund is only for “business use,” which is the only reason that makes this GST ITC eligible credit. But out of the total fund raised, an amount of 1000 Crores is directly taken over by the promoters. So, this portion of the fund does not come to the company. Thus, the company is not allowed to avail the full GST credit as the whole of the fund does not come into the company. Therefore, they have to reverse this total availed GST credit in the ratio of exempt turnover (OFS portion fund) (20%).
Thus, GST ITC is required to be reversed at 40 lacs (2 Crores x 1000/5000).
The respective State GST Department is continuously noticing those companies that have just listed their shares containing OFS and are issuing SCNs/Orders to reverse the proportionate GST credit in the ratio of the OFS fund portion.
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