Dibya Prakash Behera*
The Article analyses the applicability of GST on payment on interest for loans provided to the subsidiary company which is based in India by the holding company incorporated outside India. Whether such services is liable to be exempted from GST? The question has been dealt in a detailed manner in the article.
Empowered by Section 185 of Companies Act, 2013 the parent holding companies can now provide loans to their wholly owned subsidiaries provided that the loan amount is used for principal business activity purposes. However, the restriction of Section 185 proved to be a hurdle for companies providing loans to its group companies until and unless it is a wholly subsidiary company of the holding company. Subsequent to the amendment carried out in Section 185 of the Act vide Companies Amendment Act, 2017 a company has now been permitted to advance loans or give guarantees or provide security in connection with the loan taken by any person in whom the director is interested, subject to the condition that (a) prior approval of shareholders by way of a special resolution is obtained; and (b) such loan may only be utilised for the principle business activities of the borrowing company. This has come as a respite for the companies as the earlier Act prohibited such transfers on the basis of having an interested director. The Rules issued thereafter never clarified the position which was eventually addressed by the Companies Act, 2017. Further, Section 186 (7) provides for the rate of interest to be determined at a rate not lower than the prevailing yield of one year, three year, five year or then year Government security closest to the tenor of loan. The article will specifically deal with the issue of applicability of tax on such payment of interest by a subsidiary company based in India to its parent holding company which is based outside India.
Before delving into the intricacies of law, the definition of supply as provided under Section 7 of The Central Goods and Service Tax (CGST) Act, 2017 shall be noted down. Section 7 (1) (b) provides that supply shall include import of services for a consideration whether or not in the course of furtherance of business.
The word consideration derives its meaning from Section 2(d) of The Contracts Act, 1872 which read as “when, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing something, such an act or abstinence or promise is called consideration for the promise”. Further, Section 2(31) (a) of The Central Goods and Service Tax (CGST) Act, 2017 states that 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 services or both, whether by the recipient or by any other person. Consider a case where Company X, the Indian entity took loan from the foreign entity with the consideration of paying back the loan amount with interest. The GST is payable on the transaction value of supply and the consideration received can be considered as the transaction value. In other words, the payment of interest is the consideration for which the supply of loan is provided to the parent holding company.
The provision of payment of interest to the parent holding company which is situated in a non-taxable territory is in continuation of the services provided by the foreign holding company to the Indian Subsidiary in the form of extending loans. Extending of loan within itself comprised the payment of interest part as the consideration for the whole transaction.
The transaction starts from the point when Parent Holding Company provided loan to Indian subsidiary. Therefore, the service is being provided by a person situated outside India to a person situated inside India. This will fall under the definition of import of services as provided under Section 2(11) of the Integrated Goods and Services Tax Act (hereinafter referred to as “IGST”). The clauses (a) to (c) are cumulatively satisfied under Section 2 (11) of the IGST Act in the instant matter to consider the service as import of service. The first clause being the supplier shall be located outside India gets successfully fulfilled when the parent holding company is registered in a foreign nation. The second clause being that the recipient shall be in India also gets satisfied when the Indian subsidiary has its registered office in India. With regard to the third clause which talks about the place of supply of service which shall have to be India for treating the service as Import under such circumstances also gets fulfilled.
The third clause is subject to Section13 of the IGST Act. Sub-sections (3) to (12) provide for determination of place of supply of services specified therein and sub-sections (2) provide for determination of place of supply of service other than listed in sub-sections (3) to (12). This provision is of relevance to us as it states that in case of the service not falling under any of the clauses mentioned thereunder from sub-section (3) to (12), the place of supply shall be location of recipient and if the location of recipient is not known it shall be the location of the supplier. As we already have the requisite details confirming that the company is registered in India, the place of supply of service shall therefore be India. Consequently, it satisfies all the three clauses and shall therefore be treated as import of services.
Now comes the question under which head the tax will arise on such import of services as there is no import tax or any such tax. Clarifying the situation, Section 7 of IGST Act which provides for determination of supply of goods or services in the course of inter-state trade or commerce comes into picture. Sub-section (4) provides that when the supplier of services imported into India shall be treated to be a supply of services in the course of inter-state Trade or Commerce. The charging provision for the same will be Section 5 of the IGST Act which provides for levy of Integrated goods and service tax (IGST) on all interstate supplies of goods or services or both.
Further, as per the GST Flier on Reverse Charge Mechanism dated 8th August, 2017 where it was stated:-
Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.
It becomes clear that the Indian Subsidiary Company will have to pay Goods and Services Tax on the payment of interest to its foreign parent holding company.
Applicability of Exemptions (if any) on supply of such services
The service provided by the foreign parent 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).
With the recommendations tabled down in 14th GST Council Meeting held at Srinagar, Jammu and Kashmir on 19th May 2017, the fitment of rates of services were discussed and the Council broadly approved the GST rates for services at Nil, 5%, 12%, 18% and 28%. The said service found itself under the Nil rate taxable supply. In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, exempted the intra-State supply of services of description “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)” bearing Heading 9971 vide Notification No. 12/2017- Central Tax (Rate) dated the 28th June, 2017. The notification will make the supply of such service as coming under the ambit of exempt supply defined under Section 2 (47) of Central Goods and Services Tax Act which reads as “exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11, or under Section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply”.
Thereby, with the effect of this notification the said service is exempted from the net of Goods and Services Tax and hence the Indian Subsidiary will not be liable to pay any Goods and Services Tax on the payment of interest to the parent holding company. So a conclusion can be reached that the Indian Subsidiary will be liable to pay GST under Reverse Charge Mechanism as the same is import of services satisfying all the requisite provisions of CGST and IGST Act. But at the same time, they can claim exemption on the supply of such services taking into consideration the Notification No 12/2017- Central Tax (Rate) dated the 28th June, 2017 which has the effect of making such supply of service as an exempt supply.
* 4th Year Student, National University of Study and Research in Law, Ranchi.