Concerning the claims raised under the Goods and Services Tax (GST) Act, holding firms are involved in litigation. In these, those companies are included which extended corporate guarantees to their subordinate companies in India.
According to government officials, it is estimated that the total demand over the past three months to be a few hundred crores, and admit that GST litigation is showing an upturn.
The GST authorities argued that the corporate guarantee provided by the stakeholder company to its subordinate company is a free supply between related parties and covered under a taxable transaction ‘schedule 1’. These cases are handled by the Office of the Directorate General of Goods and Services Tax Intelligence (DGGI) and state-level audit teams.
If the holding company is in India, the GST claim would be raised on it. If the holding company is in overseas, the GST claim would be raised on the Indian subsidiary, which is the recipient of the corporate guarantee, under a reverse charge mechanism.
According to Pratik Jain, partner of Price Waterhouse & Co., a holding/parent company providing a guarantee for loans taken by its subsidiary company is a common practice. In order to provide financial support to subsidiaries, a corporate guarantee is given to such companies. Also, if the need arises as a part of any commercial bid applied by subsidiaries or as a ‘letter of comfort’ that the overseas company may provide.
Agreeing on strict technical interpretation, tax experts said that GST is applied to related parties practising free-of-cost supply. However, according to Jain, with reference to the extending corporate guarantee, the problem arises from the question- of whether there is any underlying supply. And how to estimate the valuation and periodicity of GST payment, in case of an underlying supply.
Rule 28 guides the mechanism to value the transaction between concerned parties, stated Manish Gadia, partner at GMJ & Co., a chartered accountants company.
The amount charged would be covered under the value of the supply if the “full” input tax credit is provided to the recipient subsidiary.
On 17th July, the Central Board of Indirect Taxes and Customs (CBIC) made it clear that in such cases, there has not been any tax invoice issued to the branch office for furnished services. And while the value of such services may be deemed as nil, the branch is subject to a “full” input tax credit.
According to Gadia, while it is mentioned in the circular regarding a cross charge between a head office and branch office, transaction between separate persons (head office and branch) and also concerning parties (holding company and its subsidiaries) is common under Rule 28. Therefore, the same proportion can be relevant if the value of the supply of corporate guarantee will be nil and there would not be any GST payable.
Jain said that because this circular was particularly related to cross-charge, the consequences of litigation by the GST authorities still continue.
He further added that the main concerns occur when there is no full input tax credit provided and Rule 28 cannot be applicable. In cases where the corporate guarantee is a common practice, such outcomes arise in matters of infra projects and real estate. Here valuation persists to keep demanding and the focus of the companies is on transfer pricing principles to find out the same.
He also said that some companies are paying GST under protest as they have received a transfer pricing analysis.
Commonly, in accordance with the transfer pricing study, the value is estimated between 0.5-1.5% of the extended corporate guarantee. Companies of some industries are not able to demand input tax credits. In these, real estate, power, and oil and gas are included. Hence, this is an extra cost.
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As per the instructions of the Organisation for Economic Co-operation and Development (OECD) recommends that holding companies’ activities such as providing a guarantee by a holding company, which is the shareholder to its subsidiary, should not be considered under intra-group services.
Tax professionals and India Inc. are expecting an explanation on GST applicability that it should not be applicable to corporate guarantee because there is no underlying supply.
