GST Council asserts mere holding of shares in subsidiaries exempt from tax

New Delhi, July 12, 2023 

The clarification came amid GST officers sending notices to both Indian and foreign companies, demanding tax on share capital held in their subsidiaries at 18% 

The GST Council has laid to the rest the thorny issue of taxing shares held by holding companies in their subsidiaries.

The Council, at its meeting on Tuesday, clarified that mere holding of these shares cannot be taxed under the goods and services tax (GST) as these are not supply of services.

"This much-needed clarification will arrest wasteful litigation for thousands of conglomerates working in India to whom tax officers started issuing notices to question these transactions," said Rajat Mohan, senior partner, AMRG & Associates.

The clarification came amid GST officers sending notices to both Indian and foreign companies, demanding tax on share capital held in their subsidiaries at 18 per cent.

The tax was imposed on Indian holding companies, while it was sought to be demanded from Indian subsidiaries of foreign holding companies.

The arrangement of holding shares in subsidiary companies is a normal business phenomenon. It is widely practiced by all foreign companies investing in India, whereby money is invested in shares of a company which is closely held by a group of overseas companies. It is also a normal practice for domestic holding companies.

The tax was demanded because the scheme of classification of services, adopted for GST, contains an entry, services of holding equity of subsidiary companies, against service code 997171.

Some officers adopted earning per share as taxable value for each share, while others considered one per cent of the shares held as taxable value.

As a result, Indian holding companies having subsidiaries in the country or abroad would have been paying 18 per cent GST on its share of profits of all the subsidiaries. An Indian subsidiary of a foreign holding company would have been paying 18 per cent GST on all of its profit that could be allocated to its equity shareholders whether or not such profit is earned in India.

[The Business Standard]