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.

In a notice, 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.

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.

Some tax experts maintain that under the GST law, services rendered to a related party for the furtherance of business are treated as a supply liable for taxation even if made without any consideration. “Under GST, service is defined as anything other than goods. So, giving a corporate guarantee is a service as per law and liable for taxation,” said Saurabh Agarwal, tax partner, EY.

“Secondly, there is a vested interest of a holding company in giving corporate guarantees for its subsidiary. There is an indirect benefit for the assessee in aiding the subsidiary’s business even if there is no direct compensation,” he said.

Some other experts have a different view. “For corporate guarantees to be taxable, in the absence of consideration, the essential ingredient is that there must be an ‘activity’ and hence rendition of service.

Team- Intellex Strategic Consulting Private Limited,,

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