The GST council in its meeting held on October 7, has cleared the government’s position that corporate guarantees, such as those given by a parent company to its subsidiary will be subject to goods and services tax (GST). According to tax experts, the decisions relating to corporate guarantee and GST implications are a mixed bag.
TOI had earlier reported that, holding companies which have extended corporate guarantees to their subsidiary companies in India, are embroiled in litigation relating to demands raised under the GST Act. Government officials, TOI had spoken with, had estimated the aggregate demand over the past three months to be a few hundred crore.
GST demands were raised on the holding company, if it is in India. If it is overseas, the demand was raised on the Indian subsidiary (the recipient of the corporate guarantee) under a reverse charge mechanism.
The contention of the GST authorities was that the corporate guarantee given by the holding company to its subsidiary is a free supply between related parties and falls within the ambit of a taxable Schedule-1 transaction.
With the GST council now clearing the air, the view of the litigating parties that a corporate guarantee is a shareholder function to facilitate the operations of its related party (subsidiary) and not a taxable supply will no longer hold good.
The GST council has called for insertion of sub-rule 2, in Rule 28 of the CGST Rules, 2017, to provide for the taxable value of corporate guarantee provided between related parties, as 1% of the amount of such guarantee offered or the actual consideration, whichever is higher. This valuation will apply irrespective of whether or not the full input tax credit is available to the recipient (subsidiary company).
In this context, Dhruva Advisors points out: “Recommending a minimum value for corporate guarantees of 1% of the guarantee amount is higher than the value of 0.5% as upheld by Tribunal and Courts in Income Tax cases.”
The GST Council has also held that when no consideration is paid by the company to its director in any form, directly or indirectly, for providing personal guarantee to the bank/ financial institutes on their behalf, the open market value of the said supply may be treated as zero and hence, no GST is to be payable in respect of such supply of services.
EY-India states: “The Reserve Bank of India (RBI) prohibits any payment by way of guarantee commission to directors. Non-taxability in such scenarios will align GST provisions with RBI guidelines and provide much needed relief to the industry.”
Clarificatory circulars on the decisions taken by the GST Council will be shortly issued by the Central Board of Indirect taxes and Customs (CBIC).
