Short answer: GST input tax credit (ITC) on IPO expenses depends on which part of the transaction the expense supports. Costs attributable to a company’s fresh issue can support the company’s business when the proceeds are used for that business, subject to the normal Section 16 conditions, valid tax documents and any required apportionment. Costs attributable to an offer for sale (OFS) belong economically to existing shareholders selling their shares. In the reported Telangana Authority for Advance Ruling (AAR) decision involving Sai Silks Kalamandir Limited, the company was denied ITC on the OFS-attributable costs.
A combined IPO therefore cannot be treated as one undifferentiated pool. The company should identify direct costs, allocate shared costs on a reasonable and documented basis, and retain evidence linking each claimed service to the fresh issue and to the company’s taxable business activities.
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Fresh issue and offer for sale are different GST questions
An IPO can contain two economically separate transactions even when they appear in one prospectus and use the same advisers, banks and listing timetable.
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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errors| Question | Fresh issue | Offer for sale (OFS) |
|---|---|---|
| Who supplies the shares? | The company issues new shares. | Existing shareholders sell shares they already own. |
| Who receives the sale proceeds? | The company receives the funds. | The selling shareholders receive the funds. |
| Whose business can the service advance? | Potentially the company’s, if the fundraising supports its business. | Generally the selling shareholders’ disposal of their investment. |
| Reported AAR treatment of the company’s ITC | Qualifying fresh-issue costs were treated as eligible where the proceeds were intended for business use, subject to ordinary ITC requirements. | Costs attributable to the shareholders’ OFS were not eligible to the company. |
| Primary records to retain | Tax invoices, contracts, the fresh-issue allocation, offer documents and evidence of business use of proceeds. | Evidence identifying costs borne by or attributable to the selling shareholders; those costs should not be claimed as the company’s business ITC. |
The distinction is not that one side is automatically taxable and the other automatically blocked. It is whether the input service is used, or intended to be used, in the course or furtherance of the claimant company’s business.
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Why the destination and purpose of proceeds matter
For a fresh issue, the company creates and sells new securities and receives new capital. Services such as legal work, underwriting, registrar services, banking support and publicity can be connected with obtaining funds for the company’s operations. The reported ruling treated that connection as sufficient in the circumstances before it, provided the funds were intended for business purposes and the statutory ITC requirements were met.
For an OFS, the company does not receive the sale proceeds. Existing holders sell their own shares. The company may coordinate filings, provide disclosures or pay suppliers initially, but facilitation alone does not turn a shareholder’s sale into the company’s business activity. The reported AAR therefore treated expenses attributable to the OFS as outside the company’s business for ITC purposes.
This proceeds-and-purpose analysis is more useful than labels such as “IPO expense” or “listing expense.” The same type of invoice can receive different treatment depending on whether the engagement relates to the fresh issue, the OFS or both.
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Applicant and transaction
The reported decision concerns Sai Silks Kalamandir Limited, a GST-registered public company. Its IPO included a fresh issue by the company and an OFS by existing shareholders. The reproduction of the decision reports fresh-issue-related expenses estimated at Rs. 33.763 crore. The offer documents described a fresh issue aggregating Rs. 6,000 million and an OFS aggregating Rs. 6,009.98 million. These are figures for that applicant’s transaction, not market-wide statistics or standard IPO percentages.
Intended use of the fresh-issue proceeds
The reported materials identified the fresh-issue proceeds for capital expenditure on 30 new stores and two warehouses, working capital, repayment or prepayment of borrowings and general corporate purposes. Those stated uses gave the authority a factual basis to connect the fresh-issue services with the company’s business.
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Reported conclusion
The reproduction reports that the company could claim ITC on qualifying expenses related to its fresh issue, while expenses related to the selling shareholders’ OFS could not be claimed by the company. The AAR’s reported finding includes the sentence: “the expenses incurred relatable to ‘offer for sale ’ by the existing share holders cannot be deemed to be part of the business of the company”.
How much weight to give the decision
This is a reported Telangana AAR decision reproduced by a tax publisher, not a Supreme Court or High Court judgment. The official Telangana order and a primary-source statement of its binding scope were not verified for this article. It should therefore be presented as a fact-specific ruling, not as a universal nationwide rule. Before relying on its operative wording for a claim, a taxpayer should obtain the official order and check the current CGST Act, rules and applicable advance-ruling provisions.
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Statutory framework for reviewing IPO-service ITC
Section 16: business use, documents and conditions
Section 16(1) of the CGST Act provides the broad basis for ITC on goods or services used, or intended to be used, in the course or furtherance of business. The business-use test does not disappear because an expense is incurred during an IPO. It requires the company to show what service was supplied, who used it, which part of the issue it supported and how that activity advanced the company’s business.
The usual Section 16 conditions still apply. The claimant needs valid GST documentation and must satisfy the other statutory requirements governing receipt, reporting and use of the supply. A favourable conclusion on the fresh-issue connection is not a waiver of those conditions.
Section 17(5): blocked credits
Section 17(5) contains categories of blocked credit. The reported AAR and the ICAI Indirect Taxes Committee’s 2020 Practical FAQ discuss ordinary IPO services such as legal charges, registrar fees, underwriting commission, bank charges and publicity, and do not treat those services as blocked in the circumstances considered. That observation does not decide every invoice or resolve a separate restriction that may apply to particular facts. Each service and invoice still requires its own review.
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Rule 42 and shared-use apportionment
CBIC’s input-tax-credit rules describe Rule 42 apportionment where inputs or input services are used partly for business and partly for non-business purposes, or partly for taxable or zero-rated supplies and partly for exempt supplies. A shared IPO engagement can therefore raise two separate allocation questions:
- how much of the cost relates to the company’s fresh issue rather than the shareholders’ OFS; and
- how much of the company-attributable portion is available after the company’s wider business/non-business and taxable/exempt-use calculations.
Do not treat the fresh/OFS split as a substitute for the wider Rule 42 analysis. A cost can be correctly assigned to the fresh issue and still require apportionment because of the company’s overall GST activity.
Registration timing
The ICAI FAQ states that a new company should obtain GST registration before claiming ITC on IPO services. This is professional guidance issued in 2020, so the claimant should verify the current registration rules and its own registration date before taking credit. The practical point is to avoid assuming that incorporation or a future listing automatically permits a pre-registration claim.
How to classify expenses in a combined IPO
Use a documented expense-by-expense process rather than applying one percentage to the entire IPO budget.
- Build a complete expense register. List every adviser, bank, registrar, underwriter, auditor, advertising agency, legal provider and other supplier. Record the invoice number, supplier GST details, service description, contracting party, payer and amount of GST.
- Read the engagement scope. Identify whether the contract names the fresh issue, the OFS, both components or the overall listing. A generic invoice title such as “IPO expenses” is not enough to establish business use.
- Assign direct costs first. A service performed solely for the company’s new shares should be marked as fresh-issue cost. A service performed solely for selling shareholders should be marked as OFS cost and excluded from the company’s ITC claim.
- Identify common costs. Prospectus preparation, due diligence, underwriting, registrar work, advertising, roadshows, banking and listing coordination may cover both components. Keep them in a separate common-cost category until an allocation is supported.
- Choose a reasonable allocation method. The reviewed sources do not prescribe a universal formula. Use the method that best reflects the actual service—such as documented work effort, scope, deliverables or a transaction-based measure where appropriate—and explain why it is reasonable. Do not use a convenient ratio merely because the issue sizes are similar.
- Reconcile the allocation to offer documents and contracts. The fresh-issue amount, OFS amount, named selling shareholders, payment responsibilities and use of proceeds should be consistent across the prospectus, board papers, supplier agreements and accounting records. Investigate unexplained differences.
- Test the company portion against business use. Tie the fresh-issue proceeds to stated uses such as stores, warehouses, working capital, debt repayment or general corporate purposes. Preserve budgets, board approvals and subsequent accounting evidence that show the intended business purpose.
- Apply the ordinary ITC review. Check registration, invoice validity, supplier details, receipt of services, return reporting and any Section 17 or Rule 42 restriction before claiming the allocated amount.
- Reassess changes. If the issue structure, selling shareholders, service scope or use of proceeds changes, update the allocation and consider whether credit already taken must be corrected or reversed.
Documentation that supports a defensible claim
A file should allow a reviewer to follow the money and the service from the IPO plan to the GST return. Useful records include:
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- the draft and final offer documents showing the fresh issue and OFS separately;
- board or committee approvals describing the fundraising objectives and intended use of proceeds;
- underwriting, registrar, legal, banking, advertising and other engagement letters;
- invoices containing the supplier’s GST details and a sufficiently specific service description;
- work schedules, deliverables or correspondence showing whether a supplier worked on the fresh issue, the OFS or both;
- the allocation workbook for common costs, including the chosen basis and the person who approved it;
- payment records identifying whether the company or a selling shareholder bore the cost;
- the company’s GST registration evidence and return records; and
- cash-flow, accounting and management records linking fresh-issue proceeds to the stated business purposes.
Where a selling shareholder reimburses the company for an OFS-related bill, retain the reimbursement agreement and accounting entry. Payment by the company does not, by itself, make the cost a company business expense.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How typical IPO services fit the analysis
| Service or cost | Possible treatment | Evidence needed |
|---|---|---|
| Legal advice limited to drafting the company’s fresh-issue documents | Potentially eligible to the company, subject to Section 16 and other restrictions. | Engagement scope, invoice and fresh-issue documents. |
| Legal due diligence covering the entire IPO | Common cost requiring a reasonable fresh/OFS allocation. | Work plan, deliverables and allocation rationale. |
| Underwriting for both components | Common cost; allocate the portion that supports the company’s issue and exclude the OFS-attributable portion. | Underwriting agreement and fee calculation. |
| Registrar services for the combined offer | Common cost unless the contract separates activities. | Registrar scope, application data and allocation schedule. |
| Publicity for the overall IPO | Usually requires allocation because the campaign may promote both components. | Media plan, campaign scope and documented allocation basis. |
| Adviser engaged solely by selling shareholders for their sale | OFS cost; not the company’s business ITC on the reported reasoning. | Shareholder engagement letter and invoice. |
The table describes the classification process, not an automatic result. The contract and actual work control the analysis.
Common mistakes and how to correct them
Claiming every invoice labelled “IPO expense”
A label describes the event, not the recipient of the service. Separate the fresh issue, OFS and common elements before calculating credit.
Using the fresh-issue/OFS value ratio without checking the work
Issue size can be a relevant reference point, but it may not reflect a supplier’s actual effort or deliverables. If it is used, document why it reasonably represents the service. Otherwise use a more direct measure.
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Ignoring who contracted for and benefited from the service
Review the engagement letter and deliverables, not only the invoice payer. A company may pay a bill as a matter of convenience while the service benefits selling shareholders.
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Treating the AAR as a nationwide precedent
The reported decision is fact-specific and comes through a reproduction rather than the verified official order. Use it as persuasive guidance for the fresh-issue/OFS distinction, then check current law and the taxpayer’s jurisdiction.
Stopping after the fresh-issue test
Even if a cost advances the company’s fresh issue, the claimant must still satisfy Section 16 and review blocked-credit and Rule 42 apportionment provisions.
Claiming before registration or with weak invoices
The ICAI FAQ highlights registration timing for a new company. Invoices should also identify the supplier, recipient and service clearly enough to connect the input to the claim.
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- Does the invoice relate solely to an existing shareholder’s sale? If yes, do not claim it as the company’s ITC.
- Does it relate solely to the company’s new shares? If yes, test business use, documentation, Section 16 and other restrictions.
- Does it cover both? If yes, document a reasonable allocation and exclude the OFS portion.
- Is the company-attributable service partly non-business or linked to exempt activity? If yes, apply the relevant apportionment analysis, including Rule 42 where applicable.
- Can the company prove the allocation and business purpose? If not, pause the claim, obtain better records or seek professional advice before filing.
What companies should do before filing the claim
Set the allocation policy before invoices accumulate. Ask each adviser to describe the component covered, require contracts to identify whether the mandate is for the fresh issue, OFS or both, and have finance reconcile supplier bills to the final offer documents. Keep the allocation, business-purpose evidence and statutory-condition checklist together with the GST return working papers.
Where the structure is unusual, the company has substantial exempt activity, or shareholders bear costs under complex reimbursement arrangements, obtain current GST advice based on the official ruling and the latest law. The reported Telangana decision supports a clear principle—company fundraising and shareholder selling are not the same business—but it does not supply a universal allocation formula or remove the claimant’s ordinary compliance burden.
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