The Gujarat Appellate Authority of Advance Ruling (AAAR) has upheld the AAR’s ruling by which it was held that Input Tax Credit (ITC) is not allowable on mutual fund subscription & redemption.
The bench of Sunil Kumar Mall and Rajeev Topno has observed that mutual funds are securities in terms of section 2(h)(id) of the Securities Contracts (Regulation) Act, 1956 and mutual funds, being securities, are neither goods [u/s 2(52)] nor services [u/s 2(102)].
The appellant, Zydus Lifesciences Ltd. who is engaged in the manufacture, supply and distribution of pharmaceutical products, utilizes the excess funds/cash lying idle by subscribing to various mutual funds schemes. Subsequently, they redeem it when there is a requirement of liquidity.
The appellant receives ITC in respect of inputs/input services, which are used for taxable supplies as well as towards activity of investment and redemption of mutual fund units and the present practice is that they are reversing the proportionate ITC in terms of section 17(2) of the CGST Act, 2017 read with rule 42(2) of the CGST Rules, 2017, treating the activity of investment and redemption of mutual fund units as an exempt supply.
The appellant sought the advance ruling on the issue whether the applicant is eligible to avail ITC of tax paid on common inputs & input services used in relation to the subscription and redemption of mutual funds.
The AAR has ruled that the applicant can avail ITC on common inputs and input services used in relation to the subscription and redemption of mutual funds subject to the condition mentioned in section 17(2) of the CGST Act, 2017. The value of exempt supply in terms of section 17(3), shall include the value of transactions in securities.
The appellant has challenged the AAR’s ruling on the grounds that the activity of investment in mutual fund i.e. subscription & redemption, is in the course of furtherance of business & that there is no purchase or sale transaction involved. The requirement of reversal of ITC arises only when any inputs & input services are used for effecting exempt supplies & redemption of mutual fund units does not fall within the scope of exempt supplies & hence section 17(2) is not applicable.
The appellant contended that redemption of mutual funds is distinct from sale of security; that none of the existing rules outline a specific mechanism for determining the value of ‘redemption of mutual funds’ & subsequently incorporating it into the value of exempt supply; that the mechanism for ITC reversal as prescribed is not capable since there is no sale value of mutual fund; that where the computation provision with respect to value of exempt supply is unavailable, the provisions pertaining to reversal of ITC will become ineffective in case of redemption of mutual funds.
The AAAR rejected the appellant’t contention and held that the phraseology used in Section 17(3) of the CGST Act, 2017 is” transactions in securities” and, hence, the term ‘sale’ used in the expression ” the value of security shall be taken as one per cent. of the sale value of such security” of the CGST Rules, 2017 has to be interpreted accordingly, to ensure that the provisions of Section 17(3) of the CGST Act, 2017 are not rendered otiose.
Ruling Details
Applicant’s Name: M/s. Zydus Lifesciences Ltd.
Ruling Date: 22/09/2025
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