Corporate guarantees given to subsidiaries land many Indian holding companies in a GST pickle
Aug 7, 2023
Synopsis
GST authorities hold the corporate guarantee given by a holding company to its subsidiary to be a free supply between related parties, thus falling within the ambit of a taxable ‘schedule-1’ transaction.
More and more holding companies in India have found themselves embroiled in litigation over extending corporate guarantees to their arms, a ToI report said on August 7. According to the report, the number of such cases is on the rise.
The cases relate to demands raised under the Goods and Services Tax (GST) Act. As per estimates by officials, the aggregate demand in the past three months amounts to a few hundred crores.
The office of the directorate general of goods and services tax intelligence (DGGI) as well as state audit officials are currently probing such cases across sectors.
GST authorities hold the corporate guarantee given by a holding company to its subsidiary to be a free supply between related parties, thus falling within the ambit of a taxable ‘schedule-1’ transaction.
Officials have now raised GST demand on the holding company in cases where it is in the country. In cases where the holding company is located overseas, the demand is being raised on the Indian subsidiary under a reverse charge mechanism.
"It is common practice for the holding/parent company to stand as a guarantor for loans drawn by its subsidiary. The corporate guarantee is provided for the purpose of financing of subsidiaries, or if needed as a part of any commercial bid applied by subsidiaries, or as a ‘letter of comfort’ which may be provided by the overseas company," Pratik Jain, partner at Price Waterhouse & Co, told ToI.
Tax experts say that on a "strict technical interpretation, a free of cost supply between related parties is subject to GST," the report said.
According to Jain, though, in the context of extending a corporate guarantee, the issues involved range from "whether there is any underlying supply, if there is an underlying supply what should be the valuation and periodicity of payment of GST."
“Rule 28 provides the mechanism to value the transaction between related parties. If ‘full’ input tax credit is available to the recipient subsidiary, then whatever amount is charged would be considered as the value of the supply,” the report quoted Manish Gadia, partner at GMJ & Co, as saying.
The Central Board of Indirect Taxes and Customs (CBIC) had clarified on July 17 that in those instances "where the head-office has not issued a tax invoice to the branch office for services provided to it, and the branch is eligible for ‘full’ input tax credit, the value of such services may be deemed as ‘nil’."
“While this circular refers to a cross-charge between a head-office and branch office, Rule 28 is common for transactions between distinct persons (head office and branch) and also related parties (holding company and its subsidiaries). Hence, the same ratio can be applied where the value of the supply of corporate guarantee will be nil and no GST will be payable,” Gadia told the newspaper.
As this circular was specific to cross-charge, there remains the danger of GST litigation, Jain explains.
“The larger issue arises in cases where input credit is not fully available and Rule 28 cannot be applied. This happens in cases of infra projects and real estate where corporate guarantee is most common,” he added.
[The Economic Times]
