The Authority for Advance Ruling, Gujarat in the case of M/S. ZYDUS LIFESCIENCES LTD., vide Case No. GUJ/GAAR/R/2025/09 (In Application No. Advance Ruling/SGST& CGST/2024/AR/08) dated 25.03.2025, ruled that the applicant is not eligible to avail ITC of tax paid on inputs and input services used in relation to the subscription and redemption of mutual funds, and is required to reverse ITC on common inputs/input services used for such purposes, as per Section 17(2) read with Rule 42 of the CGST Rules.

Facts of the Case: In this case, the applicant is engaged in manufacturing and supply of pharmaceutical products. The surplus funds of the company are invested in mutual funds and the company incurs various input services such as legal, professional, accounting, and consulting fees related to those investments.

The Applicant argued that investing idle funds is part of business treasury management and same is an recognized ancillary activity. Further, argued that redemption is not a “transaction in securities” likewise to sale/purchase, but a mere extinguishment of a right by returning the unit to AMC and not a trade or transfer. Further, the applicant submitted that machinery provision of Rule 42 of the CGST Rules, 2017 breaks down due to lack of clarity on valuation of redemption activity.

The Applicant referred various judgments to supports its view.

Issue: Whether subscription/redemption of mutual fund units is a “supply” under GST. Whether it can be deemed an “exempt supply” under Section 17(3). Whether ITC is required to be reversed under Rule 42.

AAR’s Rulings: The AAR observed and ruled as under:

The AAR in respect to Redemption of Mutual Fund Units, noted that redemption involves giving up units to the AMC in exchange for money. The AAR applied the common parlance test and held that this is equivalent to “sale” of securities. Accordingly, ruled that since securities are not goods or services, their sale is outside the scope of supply under Section 7(2)(a) of the CGST Act.

Further, in accordance in Section 17(3), the value of exempt supply shall include transactions in securities. Rule 45(2)(b) of the CGST Rules further deems 1% of the sale value of securities to be the value of exempt supply for apportionment purposes. Therefore, redemption proceeds i.e. 1% of the value are treated as exempt supply solely for the purpose of input tax credit apportionment under Rule 42. Also, in this context the AAR observed that Section 16(1) requires inputs to be used “in the course or furtherance of business.” However, investing surplus funds in MFs is not “in furtherance of business” but is an act of investment, which is capital in nature and not related to supply of goods/services. 

Thus, the AAR ruled that ITC on common input services used for mutual fund transactions is not available. Redemption of MF units is treated as an exempt supply, requiring proportionate ITC reversal under Rule 42, if not fully disallowed under Section 16(1).