GST on Initial Public Offers (IPO) and Offer for Sale (OFS)
                     GST on Initial Public Offers (IPO) and Offer for Sale (OFS)
Decoding issues under GST of Initial Public Offers (IPO) and Offer for Sale (OFS) Implication Under Section 2(47) of 
the CGST Act, 2017 and under Rule 42 of CGST Act, 2017 The Goods and Services Tax (GST) implications 
surrounding Initial Public Offers (IPOs) and Offers for Sale (OFS) in India, particularly regarding Input Tax Credit 
(ITC) reversal, are indeed complex and a subject of ongoing debate and litigation. The core of the issue lies in the 
classification of these transactions under GST law. Let’s break down the points you’ve raised:
1. Distinction between “Creation” and “Transfer” of Securities under Section 2(47) of the CGST Act, 2017: You 
rightly highlight a crucial distinction. Section 2(47) defines “exempt supply” to include non-taxable supplies, and 
Schedule III of the CGST Act explicitly states that “transactions in money and securities” are neither treated as 
supply of goods nor services. Company argument: An IPO, involving a fresh issue of shares, is a “creation” of new 
capital, not a “transfer” of existing securities. Therefore, it shouldn’t fall under the ambit of “transactions in 
securities” as an exempt supply. If it’s not a supply at all, the question of exemption and corresponding ITC 
reversal under Rule 42 shouldn’t arise. The expenses incurred are for the furtherance of business (raising 
capital), making ITC eligible under Section 16(1). Authority’s argument: 
The GST authorities tend to view the entire listing process, including IPOs, as transactions related to 
securities. Since transactions in securities are exempt supplies, they argue that any ITC on services 
consumed for such exempt supplies should be reversed under Rule 42.
 Decoding this issue: This is the crux of the dispute. Many legal and tax experts align with your view 
that a fresh issue of shares is a capital-raising activity and not a “transaction in securities” as 
contemplated for exemption under Schedule III. The intent of Schedule III is to exclude financial 
transactions that represent the mere movement of money or existing securities. A fresh issue creates a 
new asset/capital for the company. This distinction is vital for claiming ITC on IPO expenses.
2. Eligibility of Input Tax Credit (ITC) on various IPO expenditures: company argument: Expenses incurred during 
an IPO (consultancy, legal fees, advertising, registrar services, etc.) are directly related to the business and its 
furtherance, aimed at raising capital. Therefore, ITC on these services should be fully eligible under Section 
16(1) of the CGST Act, which allows ITC on inputs and input services used in the course or furtherance of 
business. Authority’s argument: If the authorities classify the IPO as an “exempt supply” (due to their broad 
interpretation of “transactions in securities”), then any input tax credit related to it would be subject to 
reversal under Rule 42. Decoding this issue: If the “creation vs. transfer” argument holds, then these expenses 
are clearly for business purposes and ITC should be allowed. The challenge lies in convincing the authorities of 
this nuanced interpretation. Companies often face show-cause notices for such ITC claims.
3. ITC on expenses related to promoter’s share in case of OFS: company argument: Funds raised through OFS directly go to the 
promoters and do not come into the company for business use. Consequently, any expenses incurred by the company 
specifically for the OFS portion are not for the company’s business furtherance. Therefore, ITC on OFS related expenses is not 
admissible to the company, and proportionate common ITC related to OFS must be reversed under Rule 42. Pure Agent 
Condition: You’ve also brought in the “pure agent” concept. If the company acts as a pure agent for the promoters in incurring 
these expenses (i.e., it merely facilitates the transaction without adding its own value and is reimbursed for actual expenses), 
then there would be no GST output liability for the company on such reimbursements, and consequently, no ITC eligibility on 
the input services related to those specific expenses. if the pure agent conditions are not fulfilled, and the services are indeed 
considered as relating to transactions  and GST leviable on recovery  of expenses,  ITC eligible on input services Section 17(3) – 
Blocked Credit: for promotor You rightly mention that if the pure agent conditions are not fulfilled, and the services are indeed 
considered as relating to transactions in securities (which are exempt supplies), then the ITC would be blocked under Section 
17(3) of the CGST Act.
Decoding this issue: The position on OFS is generally clearer than IPO. Since the funds from an OFS do not flow into the 
company’s books for its business operations, the input services used for facilitating an OFS are indeed considered to be for an 
“exempt supply” (the transfer of securities by promoters). Therefore, the reversal of proportionate common ITC under Rule 42 
for OFS-related expenses is more commonly accepted and enforced by the GST authorities. The “pure agent” argument could 
be a defence if the company can demonstrate it merely acted as a conduit for the promoter’s expenses.
4. RCM implication on amounts paid to MCA, SEBI, and some other government fees: 
Reverse Charge Mechanism (RCM): Under RCM, the recipient of goods or services is 
liable to pay GST instead of the supplier. Services supplied by the Central Government, 
State Government, or Local Authority to a business entity are generally covered under 
RCM, as per Notification No. 13/2017-CT(R). Exemptions for Government Services: 
However, there are specific exemptions for certain services provided by government 
entities. For example, services by way of “registration required under any law for the 
time being in force” are exempt from GST (Notification No. 12/2017-CT(R)). MCA/SEBI 
Fees: Fees paid to MCA (Ministry of Corporate Affairs) for various filings (like Form SH-7 
for alteration of share capital) and to SEBI for regulatory approvals and listing fees are 
typically considered services provided by a government authority. Argument for 
Exemption: Many argue that these fees are for statutory compliance and “registration 
required under any law,” and therefore, should be exempt from GST. If exempt, then no 
RCM liability arises. Argument for RCM: The GST authorities may argue that not all fees 
paid to these bodies fall under the specific exemption for “registration.”
They might view some fees as for specific services provided to the business entity, 
attracting RCM if not specifically exempted. There have been court decisions (like 
the Delhi High Court decision in the case of Central Electricity Regulatory 
Commission vs. Union of India & Ors) that have clarified the non-applicability of GST 
on certain regulatory fees, aligning with the “sovereign function” or “statutory duty” 
aspect. Decoding this issue: This is another area of contention. Companies often 
take the position that statutory fees paid to regulatory bodies like MCA and SEBI are 
exempt services under GST. However, the authorities may scrutinize the nature of 
each fee to determine if it truly falls under the exemption for “registration required 
under any law.”
5. Employee Stock Options (ESOPs): Your statement: “ESOPs should be kept out of the GST dispensation as these are ‘in nature of 
securities.'” Current Position: Generally, the issuance of ESOPs by an Indian company to its employees is not subject to GST. 
Employer-Employee Relationship: Services provided by an employee to an employer in the course of or in relation to 
employment are outside the scope of “supply” under GST (Schedule III, Paragraph 1). ESOPs are typically considered a part of 
the employee’s remuneration. Securities: As you mentioned, shares/securities themselves are neither goods nor services under 
GST. Caveats (especially for foreign holding companies): There has been some litigation and clarification regarding ESOPs where 
a foreign holding company allots shares to employees of its Indian subsidiary. If the Indian subsidiary merely reimburses the 
foreign holding company for the actual cost of the shares, GST is generally not applicable, as it’s seen as a transaction in 
securities or an employer-employee benefit. However, if the foreign holding company charges any additional fees, commission, 
or markup over and above the fair market value of the shares for facilitating the ESOP scheme to the Indian subsidiary’s 
employees, then such additional charges are considered a supply of services, and the Indian subsidiary may be liable to pay GST 
on a reverse charge basis on this additional amount. 
In summary: 
The GST treatment of IPO and OFS remains a complex area with varying interpretations. IPO (Fresh Issue): The strongest argument 
for companies is that a fresh issue of shares is a capital-raising activity and not a “transaction in securities” falling under the 
exempt supply category. Therefore, ITC on related expenses should be fully available. This is a point of frequent litigation. OFS: 
The view that OFS is a “transaction in securities” and the funds do not flow to the company’s business is more widely accepted, 
leading to the requirement of ITC reversal under Rule 42. The “pure agent” argument can be a defense. RCM on Government 
Fees: Many statutory fees to MCA and SEBI are argued to be exempt services, though this can be contested by authorities 
depending on the specific nature of the fee. ESOPs: Generally outside GST ambit as part of employment remuneration and 
securities. However, careful consideration is needed for multi-national setups where foreign holding companies are involved and 
charge additional fees.
Companies facing show-cause notices should prepare a robust defense, emphasizing the conceptual difference 
between creation and transfer of securities, the direct nexus of IPO expenses to business furtherance, and 
the specific exemptions for government services. Seeking expert legal and tax advice is crucial in navigating 
these complex issues.
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