On July 17, 2023, the GST department issued a circular to provide clarification. On the question of holding shares by the parent company:
Issue 1: Whether activity of holding shares of subsidiary by parent entity will attract GST or not?
Clarification:
Section 2(52) of the CGST Act provides a comprehensive definition of “goods”. Goods encompassing “all types of movable property except money and securities.” This definition also extends to actionable claims, growing crops, grass, and items that are attached to or form part of the land, provided they are agreed to be separated before supply or under a contract of supply.
Further definition of 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.
Both definitions exclude securities. And Securities include ‘shares’ as per the definition of securities under the Securities Contracts (Regulation) Act, 1956.
So, if the share is neither a good nor service, in such case, shares will not be considered as supply of goods or services as per section 7 of CGST Act, 2017.
It cannot be considered that the service has been provided by the holding company to its subsidiary company on ground of HSN Code “997171- the services provided by holding companies, i.e., holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest.”
Unless there is supply of service by holding company which fall under the preview of section 7 of CGST Act, 2017.
Conclusion:
The activity of holding of shares of subsidiary company by its parent entity cannot be treated as a supply of service and GST liability will not arise.
For instance, let’s consider the case of M/s Fancy Private Limited, which holds 95% of shares in M/s. Old Private Limited. The question arises whether this shareholding qualifies as a supply of service. And should it be classified under HSN Code ‘997171? which pertains to services provided by holding companies involving the holding of securities or equity interests in other companies and enterprises to obtain a controlling interest.
Based on the clarification, it can be said that such shareholding is neither a good nor a service. So, this transaction will not fall under the preview of supply and will not attract GST.
Click here for the circular issued.
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