DGGI seeks to impose a tax on corporate guarantees

The directorate general of goods and services tax intelligence (DGGI) has written tax demand notifications to a number of local business entities about corporate guarantees given on behalf of their subsidiaries as well as to multinational corporations where such guarantees have been made for their Indian subsidiaries.

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According to sources at least 14 businesses, including automakers, FMCG giants, and electrical goods manufacturers, received the notices.

The DGGI claimed that because the practice is carried out by the parent business to maximize returns on investment on these subsidiaries, it counts as a “service” liable for GST taxation. In the case of MNCs, tax authorities are using the reverse charge procedure to collect any unpaid GST from the local unit.

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During the audit, it was discovered that certain businesses were not paying tax on the corporate guarantees they had provided that were subject to GST, and as a result, a legal tax demand was made

Despite the fact that the tax demand amount is not huge, sources claimed that businesses that received such warnings have expressed concerns and are seeking legal counsel. The total amount of demand notices delivered over the past two months was estimated by officials to be between Rs 600 and Rs 700 crore.

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Although it is a regular practice for parent firms to provide corporate guarantees for their subsidiaries, it has been debated whether these guarantees qualify as taxable services.