No GST on activity of holding of shares of subsidiary company by the holding company
Definition of Goods and Services:
“Goods’’ means every kind of movable property other than money and securities but includes actionable claims ,growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
“Services’’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Supply of Goods or Services:
Supply includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST.
Case Study:
SAC ‘997171’ - Services Of Holding Equity Of Subsidiary Companies.
The crux of the dispute centred on whether the holding of shares by a parent company in its subsidiary qualifies as a “supply of service” under the GST regime. The petitioner, Yonex India Private Limited, challenged Notifications issued by the GST authorities, which were interpreted to tax the equity held in subsidiary companies as a service supply. The Karnataka High Court’s decision hinged on Circulars issued by the Central and State Governments in July 2023, which clarified that such shareholding does not constitute a supply of services under the GST Acts.
Conclusion: The Karnataka High Court’s decision in Yonex India Private Limited vs. Union of India marks a crucial clarification in the realm of GST laws concerning corporate shareholdings. By determining that such activities fall outside the scope of “supply of service,” the court has provided much-needed relief and clarity to businesses. This ruling aligns with the government’s circulars, ensuring consistency in the law’s application and safeguarding the interests of holding companies and their subsidiaries. The judgment underscores the importance of understanding the nuanced interplay between corporate activities and tax obligations, paving the way for a more transparent and equitable tax regime.
Taxability of share capital held in subsidiary company by the parent company:
| Issue | Clarification |
|---|---|
|
Whether the activity of holding shares by a holding company of the subsidiary company will be treated as a supply of service or not and whether the same will attract GST or not 1 |
Securities are considered neither goods nor services in terms of definition of goods under clause (52) of section 2 of CGST Act and the definition of services under clause (102) of the said section. Further, securities include ‘shares’ as per definition of securities under clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956.This implies that the securities held by the holding company in the subsidiary company are neither goods nor services. Further, purchase or sale of shares or securities, in itself is neither a supply of goods nor a supply of services. For a transaction/activity to be treated as supply of services, there must be a supply as defined under section 7 of CGST Act. It cannot be said that a service is being provided by the holding company to the subsidiary company, solely on the basis that there is a SAC entry ‘997171’ in the scheme of classification of services mentioning; “the services provided by holding companies, i.e, holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest.”, unless there is a supply of services by the holding company to the subsidiary company in accordance with section 7 of CGST Act. |
Conclusion:
Therefore, the activity of holding of shares of subsidiary company by the holding company cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST.
Disclaimer:
“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”
Prepared On:
17/10/23
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