Relief for Holding Companies as High Court Stays GST Circular
In a significant development, the Punjab & Haryana High Court has provided interim relief to holding companies across India. The court has put a stay on a contentious circular that had extended the Goods and Services Tax (GST) to include corporate guarantees, according to a report by the Times of India on May 7. Corporate guarantees are commitments made by holding companies on behalf of their subsidiaries, ensuring payment of loans in scenarios where the subsidiary fails to meet its financial obligations.
The circular, issued by the Central Board of Indirect Taxes and Customs (CBIC) in October, had classified corporate guarantees as a ‘supply of service’, thereby making them liable to GST. This classification applied even when no actual payment was made under the guarantee. The High Court’s stay order comes as a respite amidst rising concerns over tax liability and the assessment of the value of corporate guarantees.
India Inc. has been facing a surge in showcause notices and GST demands, with figures running into hundreds of crores. The stay order now allows companies served with such notices to seek dismissal from the High Court. The tax demands have been particularly challenging for Indian holding companies and their subsidiaries, especially when the holding company is based abroad.
Industry experts have noted an increase in the frequency of showcause notices following the circular’s issuance, impacting sectors ranging from FMCG to infrastructure. Mannat Waraich, representing Acme Cleantech Solutions in this matter, highlighted that the interim order will have a pan-India effect. The order challenges the tax officials’ assumption that all corporate guarantee transactions are subject to GST, urging that each case should be tested on its own merits.
Waraich advised companies to approach the jurisdictional high court or appellate authority if they have received showcause notices or orders demanding GST based on the circular. Sujit Ghosh, senior advocate at the Supreme Court who argued for the company, emphasized that this interim order upholds the separation of powers between the executive and judicial branches of governance. He also pointed out that Rule 28(2) of the CGST Rules, which mandates GST at 18% on 1% of the value of the guarantee or actual consideration (whichever is higher), has been challenged for being arbitrary and discriminatory.
The business community awaits further developments as the High Court’s decision has temporarily eased the burden of GST on corporate guarantees, providing a window for companies to contest unwarranted tax liabilities.
