The GST authorities argue that the corporate guarantee provided by the holding company to its subsidiary qualifies as a taxable ‘schedule-1’ transaction and is considered a free supply between related parties. The Directorate General of Goods and Services Tax Intelligence (DGGI) and state-level audit teams are currently examining such cases across various industry sectors.
If the holding company operates in India, the GST demand is raised on the holding company. If the holding company is located overseas, the demand is raised on the Indian subsidiary (the recipient of the corporate guarantee) under the reverse charge mechanism.
Pratik Jain, a partner at Price Waterhouse & Co, explains that it is common for holding/parent companies to act as guarantors for loans taken by their subsidiaries. Corporate guarantees are provided for financing subsidiaries or to support commercial bids made by subsidiaries, or as a ‘letter of comfort’ issued by the overseas company.
Tax professionals agree that under a strict technical interpretation, a free supply between related parties is subject to GST. However, Jain points out that when it comes to extending a corporate guarantee, there are several issues to consider, such as the existence of an underlying supply and the valuation and periodicity of GST payment.
Manish Gadia, a partner at GMJ & Co, a chartered accountancy firm, states, “Rule 28 provides the mechanism for valuing transactions between related parties. If the recipient subsidiary is entitled to ‘full’ input tax credit, then the amount charged will be considered as the value of the supply.”
On July 17, the Central Board of Indirect Taxes and Customs (CBIC) clarified that in cases where the head office has not issued a tax invoice to the branch office for services provided, and the branch is eligible for ‘full’ input tax credit, the value of such services may be deemed as ‘nil’.
Gadia explains, “While this circular specifically refers to cross-charges between a head office and branch office, Rule 28 is applicable to transactions between distinct persons (head office and branch) as well as related parties (holding company and subsidiaries). Therefore, the same principle can be applied to corporate guarantees, resulting in a nil value and no GST liability.”
According to Jain, although this circular specifically addresses cross-charges, there remains a risk of litigation from the GST authorities. Jain further explains, “The larger issue arises in cases where input credit is not fully available and Rule 28 cannot be applied. This is often seen in infrastructure projects and real estate where corporate guarantees are prevalent.”