18% GST on corporate guarantee given in favour of related parties

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Corporate guarantees given in favour of related parties will be liable for 18 per cent goods and services tax (GST) on 1 per cent of the amount guaranteed or on the actual consideration, whichever is higher.

However, personal guarantees offered by the promoter or director of the company might not attract tax.

The GST Council may introduce these clarifications when it meets on Saturday, people privy to its agenda told Business Standard.

Once it is approved, a circular will be issued clarifying the taxability and valuation aspect of corporate and personal guarantees, they said.

The move, if implemented, is expected to resolve conflicts on levying GST on personal and corporate guarantees between related parties.

Currently various practices are being followed by the tax authorities and taxpayers in determining taxable value in the absence of clear rules pertaining to those.

“Various representations have been received from trade associations, seeking clarity on the taxability and valuation aspects after facing conflicts during GST audits by field officials,” a source said.

Some arguments were that GST would be levied on the amount offered by the holding company to a subsidiary.

Some referred to matters of the pre-GST era (service tax) where it has been held that the nature of corporate guarantees and bank guarantees was the same and would be applicable on the commission charged.

The issue was taken up by the GST Council’s law panel during multiple meetings in August and September. After extensive deliberations, it suggested adopting valuation rules in line with safe harbour rules under the Income-Tax Act.

“It was observed that under Rule 10TD pertaining to safe harbour (under Income Tax Rules, 1962) for providing corporate guarantees in eligible international transactions, the minimum acceptable commission/fee is 1 per cent of the amount guaranteed. Therefore, it is proposed that we may consider adopting the same in the case of related persons under GST also,” a person privy to the deliberations said.

While proposing this, the law panel underlined that Schedule 1 of the Central GST stated: The supply of goods and services or both between related persons, when made to further business, shall be treated as supply even if made without consideration.

However, the panel is of the view that in order to ensure uniformity in implementing the law in the country, the activities should be specified.

The GST Council is expected to approve the suggestions in its meeting, they said.

A corporate guarantee is an arrangement among group companies by which an associate entity (usually the parent company) agrees to act as a guarantor for another (subsidiary company) while securing loan/credit facilities from a bank.

These arrangements are executed either without any consideration or with a nominal commission on the loan amount.

“In order to avoid litigation in the valuation aspects of corporate guarantees between related parties, it is essential to have a very low presumptive value on which GST can be levied. Such value should preferably be aligned with the relevant provisions in the direct taxes,” said M S Mani, partner, Deloitte India.

In the case of a personal guarantee, the law panel cited the Reserve Bank of India’s mandate that said no consideration by way of commission, brokerage fees, or any other form could be paid to the director by the company, directly or indirectly, in lieu of providing a personal guarantee to the bank for borrowing credit limits.

Hence there is no question of such supplies/transactions having an open-market value.

Accordingly, the open-market value of the transaction/supply may be treated as zero. In such a scenario, no tax is payable on such a supply of service by the director to the company.

In exceptional cases where the promoters, directors, or other managerial personnel are paid in any manner, the taxable value of such a supply of service shall be the consideration provided to such a person/guarantor by the company, directly or indirectly.

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Pooja Gupta

CA Pooja Gupta (CA, ISA, M.com) having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, M.com) having 15 years of experience. Educator and Digital Creator

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