GST council to clarify on corporate guarantees, some exemptions likely

Published on: Thu Oct 05 2023
GST council to clarify on corporate guarantees

Corporate guarantees provided to related parties will be subject to an 18 percent Goods and Services Tax (GST) on either 1 percent of the guaranteed amount or the actual consideration, whichever is higher. However, personal guarantees offered by the company's promoter or director may not be subject to taxation.

The GST Council is expected to introduce these clarifications during its upcoming meeting on Saturday, according to insiders familiar with its agenda, as reported by Business Standard.

Once approved, a circular will be issued to provide clarity on the tax treatment and valuation of both corporate and personal guarantees.

This move, if implemented, is anticipated to resolve disputes regarding GST levies on personal and corporate guarantees between related parties.

Presently, various practices are being followed by tax authorities and taxpayers for determining the taxable value due to the absence of clear rules on this matter. "Numerous trade associations have sought clarification on taxability and valuation after encountering conflicts during GST audits conducted by field officials," said a source.

Some arguments have centered around whether GST should be applied to the amount offered by the holding company to its subsidiary. Others have referred to pre-GST era (service tax) cases where it was determined that corporate guarantees and bank guarantees were of a similar nature and subject to commission charges.

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The issue was discussed in multiple meetings by the GST Council's law panel in August and September. After thorough deliberations, it recommended adopting valuation rules aligned with the safe harbor rules outlined in the Income-Tax Act.

"It was noted that under Rule 10TD related to safe harbor in international transactions under the Income Tax Rules, 1962, the minimum acceptable commission/fee is 1 percent of the guaranteed amount. Consequently, it is proposed that a similar approach may be considered for related parties under GST as well," an insider privy to the discussions revealed.

While proposing this, the law panel emphasized that Schedule 1 of the Central GST stipulates that the supply of goods and services between related parties, when conducted to further business, shall be considered a supply even if made without any consideration.

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Nonetheless, the panel believes that specifying the activities is necessary to ensure uniform implementation of the law across the country.

It is anticipated that the GST Council will approve these recommendations during its meeting.

In the context of corporate guarantees, these arrangements typically involve group companies, with one entity (usually the parent company) acting as a guarantor for another (usually a subsidiary) when securing loans or credit facilities from a bank. Such arrangements may involve no consideration or a nominal commission based on the loan amount.

Regarding personal guarantees, the law panel referred to the Reserve Bank of India's directive, which prohibits any consideration, such as commission or brokerage fees, from being paid directly or indirectly to a director by the company in exchange for providing a personal guarantee for bank credit limits. Consequently, such supplies or transactions are considered to have zero open-market value, and no tax is payable on these services provided by the director to the company. 

However, if promoters, directors, or other managerial personnel are compensated in any manner, the taxable value of the service supply will be the consideration provided directly or indirectly to such a person or guarantor by the company in exceptional cases.

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