No GST on Shares Held in a Subsidiary Company: CBIC Clarification

The Central Board of Indirect Taxes and Customs (CBIC) has recently issued a significant clarification regarding the taxability of shares held by a holding company in its subsidiary company. This clarification, communicated through GST Circular 196/08/2023 dated July 17, 2023, aims to address concerns raised by trade and field formations regarding the classification of such transactions under the Goods and Services Tax (GST) regime.

Understanding the Concerns

Numerous representations were received by the CBIC, seeking clarity on whether holding shares in a subsidiary company would be considered a “supply of service” under GST. The primary question was whether such transactions would attract GST or if they should be exempted from taxation.

No GST on Shares Held in a Subsidiary Company: CBIC Clarification

CBIC’s Clarification

In response to these concerns, the CBIC, exercising its powers conferred by section 168(1) of the CGST Act, has issued the following clarification:

Issue: Taxability of Share Capital Held in Subsidiary Company by the Parent Company

The key question is whether the activity of holding shares by a holding company in its subsidiary company should be treated as a supply of service and consequently subject to GST.

Clarification: Shares and Securities Not Classified as Goods or Services

The CBIC clarifies that, according to the definitions provided in the CGST Act, shares and securities are neither goods nor services. Additionally, the definition of securities under the Securities Contracts (Regulation) Act, 1956, explicitly includes “shares.”

This means that the holding of securities, including shares, by a holding company in its subsidiary company does not fall under the purview of goods or services. Simply buying or selling shares or securities does not qualify as a supply of goods or services. For a transaction or activity to be considered a supply of services, it must satisfy the conditions outlined in section 7 of the CGST Act. Therefore, the mere act of holding shares in a subsidiary company does not imply that the holding company is providing a service to the subsidiary company, especially if there is no supply of services as defined in section 7 of the CGST Act.

Implications: Exemption from GST

Consequently, the activity of holding shares in a subsidiary company by a holding company, in and of itself, cannot be considered a supply of services. As a result, such transactions are not subject to GST and are exempt from taxation under the GST regime.

CBIC GST Circular 196/08/2023 dated 17/07/2023: No GST on Shares Held in a Subsidiary Company – Clarification

Conclusion

The recent clarification by the CBIC regarding the taxability of shares held by a holding company in its subsidiary company brings much-needed clarity to businesses operating under the GST regime. With this clarification, it is now clear that the mere act of holding shares does not constitute a supply of services. As a result, holding companies are not required to pay GST on shares held in their subsidiary companies.

This clarification from the CBIC ensures uniformity in the implementation of GST provisions across field formations and provides businesses with a clear understanding of the tax treatment of such transactions. Companies can now proceed with confidence, knowing that the holding of shares in subsidiary companies does not attract GST liability.

CA Abhinav Aggarwal @ CA Club CA Abhinav Aggarwal is a qualified Chartered Accountant and ICAI member since 2010. He holds vast experience in Audit, Income Tax & GST and is a passionate writer on the CA profession and related topics.

Disclaimer: While reasonable efforts have been made to ensure the accuracy and reliability of the information presented in this article, it should not be considered as professional tax advice or guidance. For compliance, the readers are advised to directly refer to the relevant laws, regulations and notifications issued by the appropriate authorities.

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