In a substantial relief for many of the holding companies in India, the Punjab & Haryana high court has stayed a circular that brought corporate guarantees under the ambit of GST, ToI reported on May 7.

Corporate guarantees are given by holding companies in favour of their subsidiaries. Under this mechanism, a company, known as the guarantor, promises to pay for a loan if the borrower (in this case, subsidiaries) doesn't fulfil their obligations. This system benefits the subsidiaries in the form of reduced risk levels.

The High Court, through an interim order, has stayed the implementation of the circular issued in October by the Central Board of Indirect Taxes and Customs (CBIC), ToI's report (by Lubna Kably) said. The circular in question had said that a corporate guarantee provided by a holding company to a bank or financial institution for the approval of credit facilities to its subsidiary would be considered a ‘supply of service' liable to GST.

The circular had additionally stated that the tax liability would occur even in cases where no payment is involved. The issue before the High Court also encompasses a challenge regarding the assessment of the value of corporate guarantees.

For the time being, the stay order provides relief to India Inc., currently grappling with showcause notices and GST demands amounting to hundreds of crores. Companies facing showcause notices due to this circular now have the option to petition the High Court to dismiss them.

The demands have been issued to the Indian holding company. If the holding company is located overseas, the Indian subsidiary, on whose behalf the corporate guarantee is provided, is faced with GST demands.

According to industry representatives interviewed by TOI, following the issuance of the circular, the frequency of showcause notices and subsequent demands escalated. Companies across various sectors, including FMCG and infrastructure, were served with such notices.

Source: The Economic Times