[Opinion] GST Credit on IPO Expenses – A matter of concern

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Manoj Mishra, Sachin Sharma & Rahul Jhawar – [2023] 147 taxmann.com 421 (Article)

The last couple of years, have been up-and-coming for the Indian economy. As a result, many Indian companies have not only managed to expand their businesses but have also generated inverstor’s interest leading to an increased capital infusion in their businesses. As per a recent data published in a newspaper, it is revealed that around 168 companies raised over INR 3.10 lakh crores through IPOs in little over five years time period ranging from July 2017 to December 2022.

Apart from investors, these IPOs have also caught the attention of the indirect tax authorities, and they are on a spree to issue notices to companies that have raised capital in the last few years through IPOs. Before we dive deep into this to understand the reason for the issuance of such notices in entirety, it is imperative to discuss different ways through which companies generally raise capital for their business.

A company usually raises capital either through equity or debt for distinct purposes such as acquisition of assets for the business or new facilities to increase the production capacity with the intent to expand the business and create additional value for stakeholders.

Here are some of the ways in which a company raises capital through equity:

Issuance of Initial Public Offer (IPO)

An IPO is the process of going public by offering shares of a private company in the primary market for the first time. In the recent past, many Indian companies have gone public and raised capital for their business by the issuance of their IPOs.

There are different scenarios covered in the issuance of an IPO which are as follows:

Fresh issue of shares: Under this scenario, a company offers a new set of securities to the public at large, and the promoters, in particular, do not offload any of their shares during the IPO
Offer for sale: Under this scenario, a company does not offer a fresh set of securities to the public. Instead, the promoters, in particular, offload all or part of their shares during the IPO. Generally, the angel investors and the venture capitalists who have invested in the early stage of the business float such ‘offer for sale’ when they intend to exit the company and book their profits
Blend of fresh issue of shares and offer for sale: Under this scenario, a company offers a fresh set of securities to the public at large and the promoters also offload a part of their shares during the IPO

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