17.07.2023: GST directorate seeks tax on corporate guarantees

The directorate general of goods and services tax intelligence (DGGI) has sent tax demand notices to several local corporate houses over corporate guarantees given on behalf of their subsidiaries, and to multinationals where they have given such guarantees for their Indian units.

The notices were sent to at least 14 companies, including automakers, FMCG and electronic goods companies, ET has learnt. 

In a notice ET has seen, the DGGI said the practice is a ‘service’ liable for taxation under GST as this is undertaken by the parent company to maximise the returns on investment on these subsidiaries. In the case of MNCs, tax authorities are seeking GST dues from the local unit under the reverse charge mechanism.

“We have discovered that some companies were not paying tax on the corporate guarantee extended by them which is liable for tax under the GST during the audit and so tax demand has been raised as per the law,” a senior official told ET.
While the tax demand amount is not very high, companies that received such notices have raised objections and are seeking legal opinion, sources said. Officials estimated the cumulative sum of demand notices sent in the last two months to be Rs 600-700 crore.
Parent companies extending corporate guarantees for their subsidiaries is a common practice but has been a subject of debate on whether it can be construed as a taxable service.
In the past, various judicial authorities have ruled on the matter of corporate guarantees under the service tax regime. In cases where the tax authorities interpreted these guarantees to be akin to banking and other financial service, judicial authorities have ruled in favour of the assessees.

In March this year, the Supreme Court of India observed in the case of Edelweiss Financial Services that service tax was not applicable when a parent company provides corporate guarantees for its subsidiaries if there was no consideration involved. 

Source: The Economic Times

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