The Directorate General of Goods and Services Tax Intelligence (DGGI) has sent tax demand notices to several local corporate houses and multinationals over corporate guarantees given on behalf of their subsidiaries and Indian units. The DGGI considers this practice as a ‘service’ liable for taxation under Goods and Services Tax (GST) as it is undertaken by the parent company to maximize the returns on investment on these subsidiaries.

Tax authorities are seeking GST dues from the local unit under the reverse charge mechanism for multinationals. The cumulative sum of demand notices sent in the last two months is estimated to be around Rs 600-700 crore.

While the tax demand amount is not very high, companies that received such notices have raised objections and are seeking legal opinion.

The scope of supply under the GST law is being debated, with some tax experts arguing that services rendered to a related party for the furtherance of business should be treated as a taxable supply even if made without any consideration. On the other hand, some experts believe that corporate guarantees do not involve any element of service and hence tax is not applicable in such cases.

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

The matter of corporate guarantees has been subject to debate under the service tax regime, and various judicial authorities have ruled on it. In cases where the tax authorities interpreted these guarantees to be similar to banking and other financial services, judicial authorities have ruled in favor of the assessees.

Kulraj Ashpnani, partner at Dhruva Advisors, argues that the scope of supply under the GST law should not be stretched to include shareholder functions.

A government clarification on the taxability of such shareholder functions in relation to corporate guarantees will be welcome by the industry.