Corporate guarantees given to subsidiaries land many Indian holding companies in a GST pickle

economictimes.indiatimes.com:

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.