A number of local corporate entities that provided corporate guarantees on behalf of their subsidiaries, as well as MNCs that provided similar guarantees for their Indian subsidiaries, have received GST demand notices from the Directorate General of Goods and Services Tax Intelligence (DGGI).
At least 14 companies, including automakers, FMCG, and electronic goods companies, have received these notices, according to information obtained.
The DGGI, in a notice, stated that providing corporate guarantees is considered a taxable ‘service’ under GST, as it is a strategic action taken by parent companies to maximise returns on investment in their subsidiaries. In the case of multinational companies, under the reverse charge mechanism, tax authorities are expecting GST payments from the local units.
During audits, it was discovered that certain companies were not paying taxes on the corporate guarantees they extended, which are legally subject to GST taxation. Consequently, tax demands have been raised under the law, as explained by a senior official.
Although the tax demands are not significantly high, the companies that received these notices have lodged questions and are seeking legal advice, as per the sources. The total amount of demand notices sent over the last two months is thought to be between Rs. 600 and Rs. 700 crore, according to officials.
The practice of parent companies providing corporate guarantees for their subsidiaries is common but has been a topic of debate regarding its classification as a taxable service.
Some tax experts believe that under GST legislation, services provided to related parties for business advancement are treated as taxable supplies, even without any consideration. A tax expert stated, “According to GST, service is anything other than goods. Therefore, providing a corporate guarantee qualifies as a service under the law and is subject to taxation.”
The tax expert further explained that the vested interest of a holding company in providing corporate guarantees for its subsidiary is another reason for taxation. Even in the absence of direct compensation, there is an indirect benefit to the taxpayer by supporting the subsidiary’s business.
On the contrary, some experts hold a different perspective. Abhishek A Rastogi, the founder of Rastogi Chambers, mentioned that corporate guarantees are not taxable when there is no consideration involved because they do not involve any element of ‘service.’
Previously, many judicial authorities have ruled on the issues of corporate guarantees under the service tax system. In instances where tax authorities considered these guarantees as similar to banking and other financial services, the judicial authorities ruled in favour of the assessees.
In March of this year, in the case of Edelweiss Financial Services, the Supreme Court of India noted that service tax is not liable when a parent company provides corporate guarantees to its subsidiaries without any consideration. Kulraj Ashpnani, a partner at Dhruva Advisors, argues that the scope of supply under the GST law should not be expanded to include shareholder functions.
