The Appellate Authority for Advance Ruling (AAAR) in Ahmedabad, Gujarat, has upheld a ruling by the Gujarat Authority for Advance Ruling (GAAR) that subscription and redemption of mutual fund units constitute a sale transaction, subject to input tax credit (ITC) reversal. The appeal was filed by Zydus Lifesciences Ltd., a pharmaceutical company that had invested surplus funds in mutual fund schemes and subsequently redeemed them to maintain liquidity.
The company had availed ITC on common inputs and input services used for both taxable supplies and investment activities, but GAAR held that the value of mutual fund transactions must be treated as part of exempt supplies under Section 17(3) of the Central Goods and Services Tax Act, 2017. This meant that the company was required to reverse a proportionate amount of ITC.
The AAAR applied the “common parlance test” to determine that the redemption of mutual fund units amounts to a sale transaction. The bench observed that the law explicitly includes transactions in securities, such as mutual fund units, in the valuation of exempt supplies. The Central Goods and Services Tax Rules, 2017, prescribe that the value of securities shall be taken as one per cent of their sale value for the purpose of ITC reversal.
The AAAR rejected the company’s argument that no mechanism exists for computing the value of redemption for ITC reversal, stating that the rules provide a clear mechanism for computation. The authority also clarified that even if mutual fund investments are considered activities in the course of business, ITC reversal under Section 17(2) read with Section 17(3) remains compulsory.
The AAAR ruled that the company was liable to reverse proportionate ITC on common inputs and input services used in activities relating to the subscription and redemption of mutual fund units. The appeal was dismissed, and the GAAR’s decision was upheld. The ruling has significant implications for businesses that invest in mutual funds and claim ITC on related inputs and services.
The decision is based on the interpretation of Section 17(3) of the Central Goods and Services Tax Act, 2017, which includes transactions in securities within the computation of exempt supplies. The AAAR’s ruling provides clarity on the treatment of mutual fund transactions under the GST law and emphasizes the need for businesses to reverse ITC on related inputs and services. The ruling is expected to have a significant impact on the pharmaceutical and financial services industries, where mutual fund investments are common.