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Clarification on Taxability of Shares held in a Subsidiary Company by the Holding Company

Introduction

The taxability of shares held in a subsidiary company by a holding company has been a matter of concern, previously falling under the category of 'supply of services,' as covered by the Services Accounting Code (‘SAC’) 997171. SAC entry 997171 pertains to services provided by holding companies, i.e., holding securities (including shares) of companies and enterprises for the purpose of maintaining a controlling interest. Consequently, demand notices were issued to holding companies. To address this issue, the Central Board of Indirect Taxes and Customs (‘CBIC’) released Circular No. 196/08/2023-GST dated 17th July 2023, providing crucial clarification on the taxability of such shareholdings under the Goods and Services Tax (‘GST’) regime. The primary objective of this circular is to determine whether the holding of shares in a subsidiary company by the parent company constitutes a ‘supply of service’ and, consequently, whether such activity attracts GST.


Clarification:

This circular puts forth the following clarifications:

  • Securities are neither goods nor services: The term ‘securities’ is defined under s. 2(h)[i] of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to include shares. Consequently, the circular states that securities do not fall within the definitions of ‘goods’ or ‘services’ as provided under the Central Goods and Services Tax (‘CGST’) Act, 2017. Specifically, as per s. 2(52)[ii] of the CGST Act, goods are defined, and s. 2(102)[iii] of the same Act defines the term services. Since securities do not fit into either of these definitions, they are not considered goods or services for GST purposes.

  • Purchase or sale of shares does not constitute supply of goods or services: The circular emphasizes that the mere purchase or sale of shares or securities by a holding company in a subsidiary company does not qualify as supply of goods or services. To be considered a supply of services under GST, a transaction must meet the criteria outlined in s. 7 of the CGST Act. Without fulfilling these conditions, a transaction cannot be categorized as a supply of services.

Based on these clarifications, CBIC concludes that the activity of holding shares in a subsidiary company by the holding company, cannot be treated as supply of services. As a result, this activity will not be subject to GST.


Conclusion:

In light of the clarifications provided by CBIC, it is now conclusively determined that the activity of holding shares in a subsidiary company by a holding company does not constitute the supply of services. Accordingly, it shall not be subject to GST. This clarification brings much-needed certainty to the tax treatment of such shareholding arrangements and relieves holding companies from the burden of GST demands that were previously imposed on them under the assumption of it being a 'supply of services.' Any difficulties faced by stakeholders in the implementation of this circular are encouraged to promptly bring them to the attention of CBIC. This circular ensures uniformity in the implementation of the law across different field formations, providing clarity to businesses and promoting compliance with the GST regulations.


End Notes:


[i] Section 2 of SCRA, 1956:(h) “Securities” include: (i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

[ii] Section 2 of CGST Act, 2017: (52) "goods" means every kind of movable property other than money and securities but includes actionable claim, 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.

[iii] Section 2 of CGST Act, 2017: (102) "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.


Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

Metalegal Advocates is a litigation-based law firm based in New Delhi and Mumbai, providing litigation and advisory services in the fields of economic offences, tax (income-tax, GST, black money, VAT and other taxes), general corporate advisory, FEMA, commercial laws, and other related business and mercantile laws to businesses and individuals in a wide array of industry verticals. 

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