Anticipating a potential litigation minefield, the Goods and Services Tax Department has clarified that holding shares of a subsidiary company will not attract the levy of indirect tax.
Securities held by the holding company in the subsidiary company are neither goods nor services, the Central Board of Indirect Taxes and Customs has said. The purchase or sale of shares or securities, too, won't be subject to GST, the department said.
The CBIC has clarified that there are no services here, primarily because shares and securities are not treated as goods or services under the GST law, said Shashi Mathews, partner at IndusLaw. "Therefore, there cannot be any service in holding shares."
The GST Council has acted proactively to address the issue of holding equity in a subsidiary company before it turned out to be a full-fledged litigation, according to Nidhi Lukose, partner at Deloitte India.
The authorities in certain pockets used to rely on the Services Accounting Code classification—used to determine the applicability of GST on services—which had a description called services of holding equity of subsidiary companies, Lukose said.
The essence of the circular is that purchase or sale of shares or securities, in itself is neither a supply of goods, nor a supply of services and for a transaction to be treated as supply of services, there must be a supply and not merely a classification entry.Nidhi Lukose, Partner, Deloitte India
This was a case of implied service, where the authorities said that the sheer act of holding shares in a subsidiary amounted to service, Divakar Vijayasarathy, founder of DVS Advisors, said. "Then, the authorities sent demand notices and created their own mechanisms of how to value the service. It was a good work of imagination in terms of how to compute an implied service."
Due to this kind of interpretation, in certain states, companies received notices questioning them on why they were not paying GST on holding services, he said.
The CBIC clarification will likely put an end to any kind of wasteful litigation caused by such notices. This will have an impact on notices that have already been issued. Any company that has received such notices can take advantage of this clarification to defend itself, and the demand will definitely be dropped, Mathews said.
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