This article analyses the applicability of GST(if any) on interest paid on loans to foreign-based Parent Company by its subsidiary based in India. Whether such transaction is liable to GST?? Let's look in detail.
Section 185 of Companies Act,2013 amended by the Companies (Amendment) Act,2017 prescribes that a holding company can provide loans to its subsidiary company or can provide guarantee or security in respect of any loan made by any bank or financial institution to its subsidiary company provided that these loans are utilised by the subsidiary company for its principal business activities.
Further, Section 186(7) provided that such loan can't be given at a rate of interest not less than the prevailing yield of 1 year, 3 years, 5 years or 10 years Government Security closest to the tenor of the loan.
GST Law is an act focused primarily on Supply of Goods/Services. In order to check the applicability of GST, firstly it is determined whether such a transaction is covered in the scope of supply for the purpose of GST or not. Section 7(1)(b) of CGST Act,2017 provides that Supply includes "import of services for a consideration whether or not in the course or furtherance of business".
Now, What is "Consideration"? Consideration has been defined u/s 2(31) of CGST Act,2017 which states that "consideration in relation to the supply of goods/services or both includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or service or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government" meaning that consideration shall be anything given in money or kind in response to the supply of goods or services but excluding subsidies given the central government.
In this transaction, the parent company situated outside India is providing loans to its subsidiary company based in India. This means that the service is provided by a person based out of India to a person situated in India. This transaction will fall under the category of import of service which is defined under the IGST Act,2017. Section 2(11) of IGST Act, 2017 defines import of service as "the supply of any service, where the supplier of service is located outside India, the recipient of located in India and the place of supply of service is in India" which means that in case of import of service, the supplier is located outside India and recipient and place where service is consumed is in India. On fulfilment of these 3 conditions, the transaction shall be treated as Import of Service.
Section 13(2) of IGST Act,2017 provides that Place of supply of Services other than services mentioned in Section 13(3) to Section 13 (2) shall be the location of the recipient. In case the location of the recipient is not available, the place of supply shall be the location of the supplier of service. Since the subsidiary company is situated in India, the location of the recipient is known to us. Section 7(4) of IGST Act,2017 provides that "Supply of Services imported into India shall be treated to be a supply of services in the course of Inter-State trade or commerce." which means that IGST shall be charged on such service on account of Section 5 which provide for levy of IGST on Inter-State trade or commerce.
Import of Service shall be liable to tax under the Reverse Charge Mechanism on imports of good or services. Reverse Charge means the liability to pay tax to the government falls on the recipient of such supply of goods or services instead of the supplier of such goods or services (as per GST Flier on Reverse Charge Mechanism dated 8th August 2017).
The service provided by a foreign holding company can be classified under "Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount(other than interest involved in credit card services)" which is exempt as per Entry No.27 of Notification no.12/2017-Central Tax Rate dated 28th June 2017. "Exempt supply" as per section 2(47) of CGST Act,2017 means "Supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt for tax under section 11 of CGST Act, or under section 6 of IGST Act and includes non-taxable supply" meaning that no tax shall be charged on "exempt supplies".
Thus, after taking into account all these provisions, it is imperative to concur that Interest paid on loans by a subsidiary to its foreign holding company shall be exempt from the levy of GST.
Source: CGST Act,2017 & IGST Act,2017.
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